Discretionary order in an electronic guaranteed entitlement environment

ABSTRACT

An enhanced system and method for handling, matching and executing discretionary orders in an electronic options environment is disclosed. Market maker entitlements are integrated with the discretionary order processing, so that the market maker is guaranteed an allocation of the trade if the market maker is at the NBBO when an incoming discretionary order priced at or better than the NBBO is received. If the incoming discretionary order cannot execute at the NBBO using its display price, then it will use as much discretion as is required to participate in a market maker entitlement if the market maker is quoting at the NBBO, and to execute against the order book and route to away markets quotations at the NBBO. Once posted to the order book, only the display price of a discretionary order is eligible for preferential execution in a market maker entitlement process.

CROSS-REFERENCE TO RELATED APPLICATIONS

This application claims priority from and claims the benefit of U.S.Provisional Application No. 60/834,327, filed Jul. 28, 2006, entitled“Electronic Equity Options Order Execution and Routing System,” which ishereby incorporated by reference.

BACKGROUND

Historically, a discretionary order referred to a large order given to amarket maker by an institutional customer to “work” over time at hisdiscretion, which gave the market maker the right to determine when, andat what prices, to execute the trades. On the current optionsmarketplace, users are generally not able to submit electronic ordersthat include superior, nondisplayed prices for automatic matching in theorder books.

Discretionary orders have been in use on electronic equitiesmarketplaces for years, i.e. in marketplaces that apply price/timepriority rules. They have not been in use, however, in marketplaces thatprovide guaranteed entitlements to specified market participants, suchas a lead market maker in an options series.

Accordingly, there is a need for a discretionary order thatsimultaneously respects both traditional specialist/market makerguaranteed entitlements, when they are applicable, and price/timepriority matching principles. To encourage market makers to quote attheir best prices to participate with an incoming discretionary order,there is a need for a market maker guaranteed entitlement model thatrequires the market makers to be quoting at the national best bid andoffer (“NBBO”) at the time the incoming discretionary order is received.To encourage customers who post discretionary orders to display pricesat the NBBO to the marketplace, there is a need for a market makerguaranteed entitlement model that only gives preference to the displayedprice of a posted discretionary order, and executes the superior,nondisplayed discretionary price according to price/time prioritymatching principles.

SUMMARY

According to one aspect of the present invention, a method for tradingdiscretionary orders in an electronic options trading environment withmarket maker participation includes providing a market center whichlists options series, wherein the market center has an order book foreach option series and a quote book for each option series, wherein theorder book has a displayed interest component and a nondisplayedinterest component and wherein a plurality of the option series have anappointed lead market maker. The method further includes receiving anincoming discretionary order having a display price for display and adiscretionary price that is not displayed, and determining if thediscretionary order is marketable using either its display price, or ifnecessary, its superior discretionary price. If the discretionary orderis marketable, the method further includes determining if thediscretionary order is for an option series that has a lead market makerand, if so, determining if the lead market maker has a quote at theNBBO. Wherein if the discretionary order is marketable and the leadmarket maker has a quote at the NBBO, the method further includescomputing an allocation percentage for the lead market maker andmatching the incoming discretionary order up to the lesser of the totalsize of the discretionary order or the computed allocation percentageamount for the lead market maker.

According to another aspect of the present invention, the method mayinclude, prior to computing the lead market maker allocation percentage,determining if the order book has a customer order at the NBBO and ifthe order book does have a customer order at the NBBO, determining ifthe customer order is displayed and was posted to the order book priorto the lead market maker quote at the NBBO. It should be noted that inthe case of a customer discretionary order, the order is determined tobe at the NBBO only if its display price is at the NBBO. Wherein if thecustomer order at the NBBO is displayed and was posted to the order bookprior to the lead market maker quote at the NBBO, the method matches theincoming order with the at least one customer order. However, if thecustomer order at the NBBO was posted to the order book after the leadmarket maker quote at the NBBO or if the customer order at the NBBO isnot displayed, the method proceeds to compute the lead market makerallocation percentage.

According to yet another aspect of the present invention, the method mayinclude the lead market maker having a quote at the NBO or the NBB. Themethod may also determine if an incoming discretionary order is tooexecutable. The method may also have a market maker appointed in theoption series in addition to the lead market maker. Wherein if theincoming discretionary order is from a specified order sending firm andis directed to and designates the appointed market maker, the method mayinclude determining if the order sending firm is permissioned to directorders to the designated market maker. If the order sending firm doeshave permission to direct orders to the designated market maker, themethod may determine if the designated market maker has a quote at theNBBO and if the designated market maker has a quote at the NBBO, themethod computes an allocation percentage for the designated marketmaker. The method may then match the incoming discretionary order up tothe lesser of the total size of the discretionary order or the computedallocation percentage amount for the designated market maker.

According to another aspect of the present invention, the market centermay include a display order process, a working order process and arouting process, wherein, after an incoming discretionary order ismatched with the lead market maker quote, the method may process theincoming discretionary order in the display order process, the workingorder process and the routing process.

According to another aspect of the present invention, a market centerwhich lists a plurality of options series and handles discretionaryorder trading includes an order book for each option series and a quotebook for each option series, wherein the order book has a displayedinterest component and a nondisplayed interest component and wherein aplurality of the option series have an appointed lead market maker. Themarket center further includes an interface for receiving orders and aninterface for receiving quotes, a market center memory for storing codefor analyzing and processing orders and quotes and a processor forinteracting with the interfaces and executing the code for analyzing andprocessing quotes and orders. The code, when executed, receives anincoming discretionary order having a display price for display and adiscretionary price that is not displayed, retrieves the side of theNBBO opposite the incoming discretionary order, and determines if theincoming discretionary order is marketable using either its displayprice, or if necessary, using its superior discretionary price. If thediscretionary order is marketable, the executed code further determinesif the discretionary order is for an option series that has a leadmarket maker and, if so, determines if the lead market maker has a quoteat the NBBO. Wherein if the discretionary order is marketable and thelead market maker has a quote at the NBBO, the executed code furthercomputes an allocation percentage for the lead market maker and matchesthe incoming discretionary order up to the lesser of the total size ofthe discretionary order or the computed allocation percentage amount forthe lead market maker.

DESCRIPTION OF THE DRAWINGS

These and other features, aspects and advantages of the presentinvention will become better understood with regard to the followingdescription, appended claims and accompanying drawings where:

FIG. 1 is a block diagram illustrating the trading environment in whichan embodiment of the present invention operates;

FIG. 2 is a block diagram illustrating an overview of the architectureinvolved in the equity options electronic order book of the presentinvention;

FIG. 3 illustrates an order execution hierarchy of the equity optionselectronic order book of the present invention;

FIGS. 4A-4B are flow diagrams illustrating a process for receiving anincoming discretionary buy order in an embodiment of the presentinvention;

FIG. 5 is a flow diagram illustrating a process for checking if a buyorder is too-executable;

FIG. 6 is a flow diagram illustrating a process for handling lead marketmaker guaranteed offer entitlements in an embodiment of the presentinvention;

FIG. 7A is a flow diagram illustrating a process for handling directedorders in an embodiment of the present invention;

FIG. 7B is an exemplary designated market maker/order sending firmpermissions table;

FIG. 8 is a flow diagram illustrating a process for handling designatedmarket maker guaranteed offer entitlements in an embodiment of thepresent invention;

FIG. 9 is a flow diagram illustrating a process where a posteddiscretionary sell order steps up to the national best offer (“NBO”) toexecute in an embodiment of the invention;

FIGS. 10A-10B are flow diagrams illustrating a process for receiving anincoming regular (non-discretionary) buy order in an embodiment of thepresent invention;

FIG. 11 is a flow diagram illustrating a process for matching anincoming buy order with resting sell orders that can execute at a pricethat is one tick inferior to the NBO;

FIGS. 12A-12B are flow diagrams illustrating a process for receiving anincoming discretionary sell order in an embodiment of the presentinvention;

FIG. 13 is a flow diagram illustrating a process for checking if a sellorder is too-executable;

FIG. 14 is a flow diagram illustrating a process for handling leadmarket maker guaranteed bid entitlements in an embodiment of the presentinvention;

FIG. 15 is a flow diagram illustrating a process for handling designatedmarket maker guaranteed bid entitlements in an embodiment of the presentinvention;

FIG. 16 is a flow diagram illustrating a process where a posteddiscretionary buy order steps up to the national best bid (“NBB”) toexecute in an embodiment of the invention;

FIGS. 17A-17B are flow diagrams illustrating a process for receiving anincoming regular (non-discretionary) sell order in an embodiment of thepresent invention; and

FIG. 18 is a flow diagram illustrating a process for matching anincoming sell order with resting buy orders that can execute at a pricethat is one tick inferior to the NBB.

DETAILED DESCRIPTION

Referring to FIG. 1, a trading environment in which an embodiment of thesystem and method of the present invention operates is depicted. Theexamples discussed herein describe the use and application of thepresent invention in an equity options market center environment, but itshould be understood that the present invention could be used in anytype of financial instrument market center environment (e.g., equities,futures, bonds, etc.). This embodiment of the invention describes theuse of multiply listed single-leg equity options, wherein contracts fora specified underlying security can be bought (if the option type is acall) or sold (if the option type is a put) at a specific strike priceprior to a specific exercise date. The functionality described herein isgenerally applicable to all standard options products (includingnear-term options and LEAPs) in all underlying securities, including butnot limited to exchange-listed stocks, Exchange-Traded Funds (ETFs),Holding Company Depositary Receipts (HOLDRs), American DepositaryReceipts (ADRs), and commonly traded indices.

The trading environment of this embodiment includes a market center 20which interacts with a number of other market centers 24 (i.e. awaymarkets) and traders at order sending firms 26 and market makers 31. Itshould also be understood that the market center 20 referred to hereinrefers to a computing system having sufficient processing and memorycapabilities and does not refer to a specific physical location. Infact, in certain embodiments, the computing system may be distributedover several physical locations. It should also be understood that anynumber of traders 26 or market makers 31 or away market centers 24 caninteract with the market center 20. The market center 20 is the marketcenter on which a specific-trader 26 posts a specific order, and onwhich a specific market maker 31 posts a specific quote. The marketcenter 20 includes an order matching engine 21, which validates,maintains, ranks, executes and/or routes all orders on the market center20, and which executes marketable quotes on the market center 20. Inthis embodiment, the code for the order matching engine 21 is stored inthe market center's memory.

The market center 20 may also include a quote and last sale interface 23that interacts with the away market centers 24 to capture quote and lastsale information. This information is stored to a best bids and offersand last sales data structure 25. This data structure 25 is where themarket best bid and offer information is stored. This data structure 25is also where the market trade reports (prints) are stored. The marketcenter 20 may also include an order and trade parameters data structure27. The order and trade parameters data structure 27 stores pre-definedtrading parameters and rules that are used by the order matching engine21 in matching orders and executing trades. The market center 20 mayalso include an order and execution interface 28 which interacts withthe traders 26, the market makers 31, the away market centers 24 and theorder matching engine 21 in the order execution process.

The market center 20 may also include an order information datastructure 29 where order information is stored and a trade informationdata structure 30 where completed trade information is stored. Themarket center 20 may also include a market maker interface 32 thatinteracts with market makers 31 to capture market maker bids and offersin assigned issues. These bids and offers are depicted in a market makerquote structure 33 in this illustration.

Throughout the discussion herein, it should be understood that thedetails regarding the operating environment, data structures, and othertechnological elements surrounding the market center 20 are by way ofexample and that the present invention may be implemented in variousdiffering forms. For example, the data structures referred to herein maybe implemented using any appropriate structure, data storage, orretrieval methodology (e.g., local or remote data storage in data bases,tables, internal arrays, etc.). Furthermore, a market center of the typedescribed herein may support any type of suitable interface on anysuitable computer system.

Referring now to FIG. 2, a trading environment in which orders andquotes are ranked and executed is depicted. Because the market center 20disclosed in this embodiment is order-driven, which encourages ordersand quotes to compete equally, the market center 20 is designed to allowusers to send a very diverse and sophisticated body of order types. Forexample, with the disclosed market center 20, a user may, as describedin detail below, use the sophisticated order types available to masktheir trading intentions from the marketplace by using order types thatdo not display all or part of an order's size or price.

The market center 20 disclosed in this embodiment also ranks all restingorders in such a manner as to give preference to displayed tradinginterest over nondisplayed trading interest at the same price so thatusers are encouraged to send displayed limit orders at the best possibleprices. The market center 20 disclosed in this embodiment can be used ina non-competing market maker environment, a competing market makerenvironment and in an environment that does not use market makers insome or all of the issues. In a preferred embodiment, described herein,the market center 20 has a non-competing market maker environment. Themarket center order books are largely flat and open based on price/timeprinciples. As described below, lead market makers are guaranteedparticipation entitlements, but only when they are already on the NBBOin their assignments, which encourages tighter spreads and fasterexecutions.

In the non-competing market maker embodiment, described herein, marketmaker quotes cannot be automatically or manually improved for thepurpose of participating with a specific incoming order, nor can amarket maker send a price-improving order for the purpose ofintercepting a specific incoming order. In this embodiment, marketmakers do not see an incoming order at all. As a result, a user of thissystem that sends an order is able to trade anonymously withoutdivulging his or her trading intentions. Another characteristic of thisnon-competing market maker embodiment, as described below, is that onlythe lead market maker (or alternatively, a specific, designated non-leadmarket maker who is temporarily granted lead market maker privileges ina directed order process) is entitled to guaranteed participation withan incoming order, and therefore complex market maker pro rataallocations, as used in prior systems, are not necessary in thisembodiment.

Referring specifically to FIG. 2, in this embodiment, market makers 31can send orders and quotes to the market center 20, and order sendingfirms 26 can send orders to the market center 20. Away market centers 24also route orders to the market center 20 and receive routed orders fromthe market center 20. Such “linkage” processing, however, is known andis not described herein. The order and execution interface 28 includes acustomer gateway routine 28 a, which, when executed, initiates a processthat determines whether and by what means a specific order sending firm26 is eligible to send orders to the market center 20, and also includesan order validation routine 28 b which, when executed, initiates aprocess that determines whether the specific order meets all thebusiness requirements of the market center 20. If an order is determinedto be valid, then the order and execution interface 28 releases theorder to the order matching engine 21 for further processing. Marketableorders are executed immediately, whereas nonmarketable orders that canexecute later are posted to an order book 29 a on the order datastructure 29. The order book 29 a includes all active nonmarketableorders resident on the market center 20, including fully-displayedorders, partially-displayed order and nondisplayed orders.

As illustrated in FIG. 2, market makers 31 may send orders as well. If amarket maker's order is determined to be valid, as with an order sendingfirm's order, then the order and execution interface 28 releases theorder to the order matching engine 21 for further processing. As withorder sending firm orders, marketable orders are executed immediately,whereas nonmarketable orders are posted to the same order book 29 a asare orders from order sending firms 26.

The market maker interface 32 includes a market maker direct connectroutine 32 a, and also includes a market maker quote engine 32 b, which,when executed, initiates a process that receives and analyzes marketmaker quotes. The quote and last sale interface 23 includes a quoteengine 23 a, which, when executed, initiates a process that receives andanalyzes away market BBO quotes and receives and analyzes theconsolidated NBBO quote.

In this embodiment, the order matching engine 21 includes a displayorder routine 21 a, a working order routine 21 b and an away marketroutine 21 c. When executed, the display order routine 21 a implements aprocess that maintains and ranks displayed orders. As indicated in FIG.2, market maker quotes are integrated with the display order routine 21a. The working order routine 21 b, when executed, implements a processthat maintains and ranks working orders. Working orders are ordershaving a conditional or undisplayed price and/or size that is notdisclosed to the marketplace, but is electronically accessible formatching. For example, a discretionary order is a working order becauseit has a displayed price and a nondisplayed price. The working orderprocess is significant to the “order-driven” market center of thisinvention because it allows highly sophisticated order types to besubmitted to the market center 20. By way of example, such sophisticatedorder types allow market participants to be active in the market withoutdisclosing trading intentions, which increases the liquidity of themarket center 20.

The display order routine 21 a receives and processes fully-displayedorders and partially-displayed orders. When presented with a marketableincoming order, the display order routine 21 a ranks disseminated marketmaker quotes and resting displayed orders or portions thereof accordingto strict price/time priority. The display order routine 21 a, in thisembodiment, includes the following sub-routines: a directed orderroutine 21 d and a lead market maker guarantee routine 21 e. Thedirected order routine 21 d is a routine that, when initiated,guarantees a specified percentage of an incoming directed order to adesignated market maker after customer orders ranked ahead of thedesignated market maker's quote execute first. The lead market makerroutine 21 e is a routine that, when initiated, guarantees a specifiedpercentage of an incoming non-directed order to a lead market makerafter customer orders ranked ahead of the lead market maker's quoteexecute first.

The working order routine 21 b receives and processespartially-displayed orders and nondisplayed orders. The working orderroutine 21 b, in this embodiment, includes the following sub-routines: areserve routine 21 g, a liquidity routine 21 h, a discretionary routine21 i and a tracking routine 21 j. The reserve routine 21 g is a routinethat, when initiated, ranks and maintains reserve orders, which displaya portion of the size to the marketplace but keep another undisplayedportion in reserve. The process initiated when the reserve routine 21 gis activated is the Reserve Process, which is described in detailherein. The liquidity routine 21 h is a routine that, when initiated,ranks and maintains passive liquidity orders, which are completelynondisclosed limit orders that grant price improvement to incomingorders. The discretionary routine 211 is a routine that, when initiated,ranks discretionary orders, which display a price to the marketplace butinclude a superior undisplayed price. The tracking routine 21 j is aroutine that, when initiated, ranks and maintains tracking liquidityorders, which are completely nondisclosed orders whose pricesautomatically track the NBBO and execute only if they can prevent anincoming order from routing.

As illustrated in FIG. 2, although market maker quotes are maintained ina separate market maker quote book 33 a, they are retrieved andintegrated with displayed orders and partially-displayed orders in theprocesses initiated when the display order routine 21 a is activated(“Display Order Process”), which includes the directed order routine 21d and the lead market maker guarantee routine 21 e, when the ordermatching engine 21 evaluates matching opportunities. As also illustratedin FIG. 2, although away market quotes are maintained in a separate awaymarket best bid and offer (“BBO”) book 25 a, they are retrieved andintegrated with displayed orders, partially-displayed orders,nondisclosed orders and market maker quotes when the order matchingengine 21 evaluates matching opportunities and routing opportunities.

FIG. 2 shows the relative rankings of various order execution routinesinitiated by the order matching engine 21. As described above, the ordermatching engine 21 has a display order routine 21 a, a working orderroutine 21 b, and an away market routine 21 c. The sequence of thesubroutines 21 d, 21 e and 21 g through 21 k generally correspond to thesequence in which the order matching engine 21, in this embodiment,attempts to process an incoming marketable order. The order matchingengine 21 attempts to execute an incoming marketable order as fully aspossible in a given routine before continuing to the next-highestranking routine.

In this embodiment, upon receiving an incoming marketable order, thedisplay order routine 21 a is typically initiated first, which activatesthe Display Order Process. The Display Order Process initiates thedirected order routine 21 d if the incoming order is a directed orderand initiates the lead market maker guarantee routine 21 e if theincoming order is unable to execute in the directed order routine 21 d.After the Display Order Process has completed, if the incoming orderstill has quantity available to trade, then the working order routine 21b is initiated next. It attempts to execute the remainder of theincoming order in the reserve routine 21 g first; in the liquidityroutine 21 h second; in the discretionary routine 21 i third; and in thetracking routine 21 j fourth. If the incoming order still has quantityremaining and is eligible to route off the market center 20, then theaway market routine 21 c is initiated next.

Referring to FIG. 3, the sequence in which resting orders and quotes areranked for execution in a preferred embodiment is shown in greaterdetail. In the example depicted in FIG. 3, there are three orders orquotes that have been ranked by each of the order execution routineprocesses, at two price levels: the NBBO, and one tick inferior to theNBBO. When the order matching engine 21 evaluates matching and pricingopportunities for a given issue (option series), it retrieves the orderbook 29 a, the market maker quote book 33 a, and the away market BBObook 25 a and momentarily combines them into a single ranked list ofbids and a single ranked list of offers in local memory. All the bids(buy orders and bid quotations) are ranked on one side of the list, andall the offers (sell orders and offer quotations) are ranked on theopposite side of the list. The ranked list of bids combined with theranked list of offers is referred to as the “virtual consolidated orderand quote list.” FIG. 3 illustrates one side of an exemplary virtualconsolidated order and quote list for a given issue.

The order matching engine 21 ranks each side of the virtual consolidatedorder and quote list according to price/time priority principles, butwith a preference for displayed orders and quotes over working orders atthe same price. This method of ranking is referred to as“price/display/time priority” in this document to indicate that anorder's display characteristics (i.e., displayed versus not displayed)trumps the time that an order is received. Simply put, at a given pricelevel, a nondisplayed order has a lower priority than a displayed orderthat was received later. As also shown in FIG. 3, resident orders andquotes always have priority over away market quotes at the same price,regardless of the time received.

Each order execution routine is responsible for ranking a subset of theresting orders and/or quotes in the virtual consolidated order and quotelist. Resting orders and quotes are generally ranked in the sequenceshown in the example of FIG. 3. Beginning with the first column of FIG.3, all market maker quotes (e.g., lead market maker quotes and non-leadmarket maker quotes) and all displayed orders (e.g., exchange-restrictedorders, inside limit orders, sweep limit orders, intermarket orders andpegged orders) are consolidated together and ranked in strict price/timepriority in the Display Order Process, regardless of the order type orquote type. The displayed portions of partially-displayed orders (forexample, the displayed portion of a reserve order, and the displayedportion of a discretionary order) are also combined with the otherfully-displayed order types and market maker quotes and ranked in strictprice/time priority in the Display Order Process.

The process initiated by the directed order routine 21 d (“DirectedOrder Process”) and the process initiated by the lead market makerguarantee routine 21 e (“LMM Guarantee Process”) match a marketableincoming order against a subset of the resting displayed orders andmarket maker quotes that are combined and ranked in the Display OrderProcess. In this embodiment, all displayed customer orders that areranked ahead of a lead market maker's quote are eligible to execute inthe LMM Guarantee Process. Similarly, all displayed customer orders thatare ranked ahead of a designated market maker's quote are eligible toexecute in the Directed Order Process. Accordingly, the displayedportion of a customer reserve order is eligible to execute in theDirected Order Process or in the LMM Guarantee Process, but itsnondisclosed reserve portion is not eligible. Similarly, the displayedprice of a customer discretionary order is eligible to execute in theDirected Order Process or the LMM Guarantee Process, but itsnondisclosed discretionary price is not eligible. If a marketableincoming order still has quantity available to trade after it hascompleted executing in the Directed Order Process or in the LMMGuarantee Process (or alternatively, if it is unable to execute ineither process), then the order matching engine 21 attempts to executethe order in the Display Order Process next, i.e., in strict price/timepriority, with no preference granted to customers or market makers.

Continuing to the second column, the Reserve Process executes thereserve portions of resting orders only after all eligible orders andquotes at the same price have been executed in the Display OrderProcess. Reserve portions of orders are ranked in the Reserve Processaccording to the price/time priority assigned to their displayedportions in the Display Order Process.

Continuing to the third column, the process initiated by the liquidityroutine 21 h (“Liquidity Process”) executes passive liquidity ordersonly after any eligible reserve portions at the same price have beenexecuted in the Reserve Process. Passive liquidity orders are ranked inprice/time priority in the Liquidity Process.

Continuing to the fourth column, the process initiated by thediscretionary routine 211 (“Discretionary Process”) executesdiscretionary orders only after any eligible passive liquidity orders atthe same price have been executed in the Liquidity Process.Discretionary prices are ranked according to the price/time priorityassigned to their displayed prices in the Display Order Process. Itshould be noted that an order executes using discretion in theDiscretionary Process only if it cannot execute at its displayed pricein the Display Order Process. This means the displayed prices for cells10 through 12 are one or more ticks inferior to the NBBO. For example,assume an option series with a minimum price increment of 0.05 where theNBB is 2.00. If the order with the highest ranking at the price of 1.95is a discretionary order whose display price is 1.95 and whosediscretionary price is 2.00, then the display price of the order isranked in cell 19 and the discretionary price of the order is ranked incell 10. It should also be noted that discretionary orders are describedas stepping “up” to a superior price, even in the case of discretionarysell orders (which step “up” to a lower price), because the best priceis shown at the top of the virtual consolidated order and quote list,the next-best price is shown lower in the virtual consolidated order andquote list, and so forth, as illustrated in FIG. 3.

Continuing to the fifth column, the process initiated by the trackingroutine 21 j (“Tracking Process”) executes tracking orders only afterany eligible discretionary orders that can “step up” to the same pricehave been executed in the Discretionary Process, and the incoming orderis about to route off the market center 20. Tracking liquidity ordersare ranked in price/time priority in the Tracking Process.

Continuing to the last column, the process initiated by the routingroutine 21 k (“Routing Process”) routes orders to eligible away marketsif the order cannot execute at the best price on the market center 20.If the order type cannot be routed, then the order is generally canceledor repriced less aggressively.

After executing against all eligible orders and quotes at the NBBO inthe sequence of their ranking (from 1 through 18 in this example), if anincoming order is allowed to execute at a price inferior to the NBBO,then it would continue to execute against all eligible orders (andquotes, if allowed) at the next-best price level, i.e., at one minimumprice increment (tick) inferior to the NBBO, in the sequence of theirranking (from 19 through 30 in this example). Although it is not shownin the illustration, the displayed prices for cells 28, 29, and 30 aretwo or more ticks inferior to the NBBO, i.e., in cells 34 through 36 orlower. As tracking orders can only execute at the NBBO by definition,they are not shown in FIG. 3 at one tick inferior to the NBBO. If anorder type (e.g., an intermarket sweep order) is also allowed tocontemporaneously route to away markets inferior to the NBBO, then theincoming order would continue to execute against the eligible awaymarket quotes at one tick inferior to the NBBO, in the sequence of theirranking (from 31 through 33 in this example).

It should also be noted that certain working order types (e.g.,discretionary orders and passive liquidity orders) can execute at pricesbetween the spread (i.e., higher than the national best bid and lowerthan the national best offer) under certain conditions. Prices betweenthe spread are not illustrated in FIG. 3. A discretionary order isallowed to execute against an incoming order at a price between thespread only if the incoming order is not priced at or better than theNBBO, and would be canceled or posted otherwise. It should be understoodthat this list of working orders is exemplary and that other embodimentsof the invention may not utilize the working orders described above ormay use differing combinations of them.

For ease of explanation, the disclosure herein describes discretionaryorders as a separate order type, but in actuality the market center 20may also allow other order types (e.g., reserve orders and peggedorders) to include discretionary prices. A pegged order with discretionbehaves like the discretionary order described in this embodiment,except that its prices are not fixed on the incoming order. Instead, theorder's displayed price is automatically set by the order matchingengine 21 in relation to the current NBBO, and the discretionary priceis automatically set in relation to the displayed price, but must alwaysbe more aggressive than the displayed price by definition. A primary pegorder with discretion is priced according to the same side of the NBBO,i.e., a primary peg buy order is priced in relation to the NBB and aprimary peg sell order is priced in relation to the NBO. In contrast, amarket peg order with discretion is priced according to the oppositeside of the NBBO, i.e., a market peg buy order is priced in relation tothe NBO and a market peg sell order is priced in relation to the NBB.

As a pegged discretionary order is generally not marketable when it isfirst received, it is ranked in the internal order book 29 a in the samemanner as a non-pegged discretionary order. The order is ranked in theDisplay Order Process according to the price/time priority of itsdisplayed price, whereas the discretionary price of the pegged order isranked in the Working Order Process according to the price/time priorityof the displayed order. While resting in the internal order book 29 a,pegged orders with discretion are automatically repriced as necessarywhen the NBBO changes. As the discretionary price is always computed asan offset from the displayed price, both the displayed price and thediscretionary price are automatically adjusted.

A resting pegged order with discretion is eligible for participation inthe Directed Order Process or the LMM Guarantee Process according to thesame rules for non-pegged discretionary orders. If the peggeddiscretionary order is a customer order with a displayed price at theNBBO and has time priority over the applicable market maker's quote(either the lead market maker or the designated market maker), then thepegged discretionary order is eligible to step ahead of other orders andquotes at the NBBO that were received earlier. However, if the displayedprice is inferior to the NBBO, then the order is not eligible toparticipate in the Directed Order Process or the LMM Guarantee Processeven if its discretionary price is equal to or superior to the NBBO.

Incoming Discretionary Buy Order Received

Referring to FIGS. 4A-4B, in this embodiment, the order matching engine21 receives an incoming discretionary buy order as indicated at step400, and determines whether the order can execute. If the incomingdiscretionary buy order is marketable against the NBO, then the processdetermines if the incoming discretionary buy order is eligible toexecute first in a guaranteed entitlement process and, if it is,processing the incoming discretionary buy order in the guaranteedentitlement process. The process then releases any unexecuted portion ofthe order to the Display Order Process for additional matchingopportunities. If the incoming discretionary buy order is not marketableagainst the NBO, it may be able to execute between the spread if thereare any resting discretionary sell orders on the internal order book 29a that can step up to match it. If, however, the incoming discretionarybuy order cannot execute, then it ranks the order in the internal orderbook 29 a in price/time priority according to its display price. Thedisplayed portion of the discretionary buy order resides in the DisplayOrder Process whereas the discretionary price resides in the WorkingOrder Process.

In step 402, the process retrieves the NBO, and in step 404, it checksif the incoming discretionary buy order's display price is greater thanor equal to the NBO. If the incoming discretionary buy order's displayprice is not marketable, i.e., its price is lower than the NBO, then theprocess continues to step 406, where it checks if the incomingdiscretionary buy order's discretionary price is greater than or equalto the NBO. If the incoming discretionary buy order's discretionaryprice is also not marketable, i.e., its price is also lower than theNBO, then the process continues to step 407, where it checks if theincoming discretionary buy order's discretionary price is greater thanor equal to the NBB.

If the discretionary price is less than the NBB, then the order is notexecutable as it would cause a trade-through violation, and must beranked in the internal order book 29 a. The process continues to step460, where it ranks the incoming discretionary buy order in the DisplayOrder Process according to the price/time priority of its display price.In step 462, the process stores the incoming discretionary buy order'sdiscretionary price in the Working Order Process. By way of explanation,the discretionary buy order has only one position in the internal orderbook 29 a. The discretionary price is not treated as a separate order.In step 464, the process publishes the discretionary buy order's displayprice to the public order book, and the process terminates in step 466as indicated.

Returning to step 407, if, however, the incoming discretionary buyorder's discretionary price is greater than or equal to the NBB, thenthe incoming order may be executable if there are eligible discretionarysell orders on the order book 29 a. The process continues to step 408,where it checks if there are any resting discretionary sell orders whosediscretionary price is less than or equal to the incoming buy order'sdiscretionary price. If there are such resting discretionary sellorders, then in step 422, the process retrieves the discretionary sellorder with the highest ranking in the internal order book 29 a at theincoming discretionary buy order's discretionary price. For example, ifan incoming buy order has a discretionary price of 2.05, then theprocess evaluates all the discretionary sell orders that can step up tothe price of 2.05 and then retrieves the discretionary sell order withthe highest ranking at the price of 2.05.

In step 424, the process checks if the incoming discretionary buyorder's size is greater than or equal to the resting sell order'sminimum discretion size (which defaults to zero if no minimum discretionsize is specified). In this embodiment, if the resting discretionarysell order does include a minimum discretion size and the incomingdiscretionary buy order does not have sufficient size to fill it, thenthe orders cannot execute, and the process continues to step 434, whereit checks if there are any additional discretionary sell orders that canstep up to trade with the incoming discretionary buy order.

Returning to step 424, if, however, the incoming discretionary buyorder's size is greater than or equal to the resting discretionary sellorder's minimum discretion size (if no minimum discretion size isspecified, then the buy order size is automatically greater), then theprocess continues to step 428, where it matches the incomingdiscretionary buy order and the resting discretionary sell order at theincoming discretionary buy order's discretionary price. Accordingly, theresting discretionary sell order only used as much discretion as wasrequired to execute.

In step 430, the process checks if the incoming discretionary buy orderstill has any quantity remaining. If it does not, then the processterminates in step 432 as indicated. If, however, the incomingdiscretionary buy order still has available contracts, then the processcontinues to step 434, where it checks if there are any additionalresting discretionary sell orders that can step up to trade with theincoming discretionary buy order.

If additional eligible orders are indeed on the order book 29 a, thenthe process returns to step 422, where it retrieves the nexthighest-ranked discretionary sell order and repeats the steps describedabove until the incoming discretionary buy order is fully matched orelse is no longer executable and must be posted. Returning to step 434,if there are no additional discretionary sell orders that can step up tomatch the incoming discretionary buy order, then the process continuesto steps 460 through 466, where it posts the remainder of the incomingdiscretionary buy order as described above and then terminates.

Returning to step 404, if, however, the incoming discretionary buyorder's display price is greater than or equal to the NBO, then theprocess continues to step 410, where the “Too-Executable Buy Order CheckProcess” is initiated at step 500 (FIG. 5). The process also continuesto step 410 if at step 406 the process determines that the incomingdiscretionary buy order's discretionary price is greater than or equalto the NBO. If the incoming discretionary buy order is not canceled bythe Too-Executable Buy Order Check Process as described in detail below,then the process continues to step 411, where it creates a virtualconsolidated order and quote list in this embodiment for the optionseries by combining the away market BBO book 25 a, the market makerquote book 33 a, and the order book 29 a, and ranking the orders andquotes according to price/display/time priority, but with a preferencefor displayed trading interest over away market quotes at the sameprice. The process continues to step 412, where it checks if the optionseries has any assigned market makers. If it does, then the processcontinues to step 414, where it checks whether the incomingdiscretionary buy order is a directed order. If the incomingdiscretionary buy order is a directed order, then the process continuesto step 416 where the “Directed Order Process” is initiated in step 700(FIG. 7A). If, however, the incoming discretionary buy order is not adirected order, then the process proceeds to step 418 where the “LMMGuaranteed Offer Process” is initiated instead in step 600 (FIG. 6).

Regardless of whether the incoming discretionary buy order executes inthe Directed Order Process, in the LMM Guarantee Process or in neitherprocess (if the applicable market maker is not quoting at the NBO and istherefore ineligible for a guaranteed entitlement), if the incomingdiscretionary buy order still has quantity available to trade, then theprocess continues to step 436, where it checks if the incomingdiscretionary buy order's display price is greater than or equal to theNBO. If it is, the process continues to step 440. If it is not, then theprocess checks if the incoming discretionary buy order's discretionaryprice is greater than or equal to the NBO at step 438, and if it is, theprocess continues to step 440 at that point as well. If, however, atstep 438, the process determines that the incoming discretionary buyorder's discretionary price is now less than the NBO (which is possibleif the order exhausted the NBO by trading), then the process continuesto steps 460 through 466, where it posts the remainder of the incomingdiscretionary buy order as described above and then terminates.

Referring to step 440, at step 440, the process checks if the marketcenter 20 is at the NBO. If it is, then the process continues to step442, where it retrieves the displayed sell order or market maker offerwith the highest ranking in the Display Order Process. If it is a marketmaker offer, then in step 443, the process in this embodiment generatesan IOC sell pseudo-order on behalf of the underlying market maker offer.In step 444, it matches the incoming discretionary buy order and thesell order or pseudo-order, at the NBO price. If the sell order is apseudo-order, then the process also notifies the market maker quoteengine 32 b of the quantity of contracts that were executed so that itcan decrement the market maker offer as appropriate.

In step 446, the process checks if the incoming discretionary buy orderhas any quantity remaining. If it does not, then the process continuesto step 458, where it terminates as indicated. If it does still havequantity available, then it returns to step 436, where it repeats thesteps described above until the incoming discretionary buy order isdepleted or can no longer execute against the order book 29 a.

Returning to step 440, if the market center 20 is not at the NBO, thenthe process may have to route the incoming discretionary buy order.However, in step 448, the process first checks if there are any restingdiscretionary sell orders that can step up to the NBO price. If thereare eligible resting discretionary sell orders, then the processcontinues to step 450, where the “Discretionary Sell Orders Step Up toNBO Process” activates and proceeds to step 900 (FIG. 9).

Returning to step 448, if, however, there are no eligible discretionarysell orders, then the process continues to step 452, where it checkswhether the incoming discretionary buy order should be routed off themarket center 20. Unless all the away market centers quoting at the NBOhave already been fully satisfied by prior routed orders, the processcontinues to step 454, where it releases the incoming discretionary buyorder to the routing process, which routes to any away market center atthe NBO whose offer size has not been fully satisfied, at thedisseminated NBO price.

The process then continues to step 456, where it checks if the incomingdiscretionary buy order has any quantity remaining after it has routed.If it does not, then the process terminates in step 458 as indicated.If, however, it still has quantity available, then the process continuesto steps 460 through 466, where it posts the remainder of the incomingdiscretionary buy order as described above and then terminates.Returning to step 452, if the process determines that the incomingdiscretionary buy order should not be routed, then the process continuesto steps 460 through 466, where it posts the remainder of the incomingdiscretionary buy order as described above and then terminates.

Too-Executable Buy Order Check Process

Referring now to FIG. 5, the Too-Executable Buy Order Check Process isillustrated. The Too-Executable Buy Order Check Process determines if anincoming buy order is “too executable,” i.e., is priced so aggressivelythat it exceeds a predefined allowable percentage through the publishedNBO quotation. In the preferred embodiment, the predefined percentage isstored as a configurable parameter “MaxPercentOffNBBO,” which caps thehighest limit price allowed for an incoming buy order based on thecurrent NBO. Additionally, the market center 20 may also decide toimplement the “too executable” check not only for displayed prices, butalso for discretionary prices. Even though discretionary prices are notposted and therefore cannot cause a crossed NBBO to be disseminated, themarket center 20 may nevertheless decide to reject overly-aggressivediscretionary prices.

In step 500, the Too-Executable Buy Order Check Process is initiatedwhen the order matching engine 21 receives an incoming buy order that ismarketable. In step 502, the process evaluates whether the check forexcessive discretion is enabled for the order type. By definition, onlya discretionary order can include a discretionary price, and therefore anon-discretionary order is never checked for excessive discretion.However, the market center 20 can choose to disable the check forexcessive discretion on discretionary orders as well.

If at step 502 the process determines that the incoming buy order is adiscretionary order and that the check for excessive discretion isenabled, then it continues to step 504, where it compares the incomingbuy order's discretionary price to the NBO. If the incoming buy order'sdiscretionary price is not greater than the NBO, then the processcontinues to step 522, where it returns to the step where the procedurewas originally initiated, as the process has determined that theincoming buy order is not “too executable.” If the discretionary priceis not too executable, then there is no reason to check if the displayprice is too executable, as by definition the discretionary price mustbe more aggressive than the display price, and this was previouslychecked by normal order validation routines.

Returning to step 504, if, however, the incoming buy order'sdiscretionary price is greater than the NBO, then the process continuesto step 506, where it retrieves the parameter “MaxPercentOffNBBO.” Instep 508, the process computes the price interval allowed beyond the NBOfor an incoming buy order (the “MaxPriceThruNBO” parameter) bymultiplying the current NBO price by the MaxPercentOffNBBO. Accordingly,the MaxPriceThruNBO parameter is computed as the stored percentageparameter times the NBO price, rounded down to the nearest tick ifnecessary. For example, if the NBO is 2.10 and the MaxPercentOffNBBO is15%, then the MaxPriceThruNBO parameter is 0.315, which would be roundeddown to 0.30 if the tick is a nickel at this price level. If the issuetrades in pennies, then it would be rounded down to 0.31 instead. Instep 510, the process adds the computed MaxPriceThruNBO parameter to thecurrent NBO to derive the highest valid discretionary price for theincoming buy order, i.e., the “MaxBuyPrice.”

In step 512, the process compares the discretionary price of theincoming buy order to the derived MaxBuyPrice parameter. If the incomingbuy order's discretionary price is not higher than the MaxBuyPriceparameter, then the incoming buy order is not “too executable,” and iseligible for further processing. In this case, the process continues tostep 513, where it returns to the step where the procedure wasoriginally initiated, as the process has determined that the incomingbuy order is not “too executable.”

Returning to step 512, if, however, the incoming buy order'sdiscretionary price is higher than the derived MaxBuyPrice parameter,then the incoming buy order is presently “too executable,” i.e., ispriced too far through the NBO. Accordingly, the incoming buy order musteither be canceled or repriced depending on the business rules of themarket center 20. In step 514, if the rules determine that the ordermust be canceled, then the process continues to step 518, where itcancels the incoming buy order and terminates in step 542, as indicated.If, however, in step 514 the business rules of the market center 20determine that the incoming buy order should be repriced lessaggressively instead of being canceled, then the process continues tostep 516, where it caps the discretionary price of the incoming buyorder at the derived MaxBuyPrice parameter. The process continues tostep 524, as having determined that the incoming buy order's originaldiscretionary price was too executable, it must now also check if theincoming buy order's display price is also too executable and must besimilarly capped.

Referring now to step 502, if, however, the process determines that thecheck for excessive discretion is not enabled for this incoming ordertype, then the process continues to step 520, where it evaluates whetherthe check for excessive marketability is enabled for the incoming ordertype, i.e., if its display price is too aggressive. If the check forexcessive marketability is not enabled, then the process continues tostep 522, where it returns to step where the procedure was originallyinitiated. If, however, the check for excessive marketability isenabled, then the process continues to step 524, where it compares theincoming buy order's display price to the NBO. If the buy order'sdisplay price is not higher, then the process continues to step 526,where it returns to the step where the procedure was originallyinitiated, as the process has determined that the order is not tooexecutable. If, however, the process determines that the incoming buyorder's price is greater than the NBO, then the process continues tostep 528 instead.

In step 528, the process retrieves the parameter “MaxPercentOffNBBO.” Instep 530, the process computes the price interval allowed beyond the NBOfor an incoming buy order (the “MaxPriceThruNBO” parameter) bymultiplying the current NBO price by the MaxPercentOffNBBO parameter.Accordingly, the MaxPriceThruNBO parameter is computed as the storedparameter times the NBO price, rounded down to the nearest tick ifnecessary. In step 532, the process adds the computed MaxPriceThruNBOparameter to the current NBO to derive the highest valid display pricefor the incoming buy order, i.e., the “MaxBuyPrice.”

In step 534, the process compares the display price of the incoming buyorder to the derived MaxBuyPrice parameter. If the incoming buy order'sprice is not higher than the MaxBuyPrice, then the incoming buy order isnot “too executable,” and is eligible for further processing. In thiscase, the process continues to step 536, where it returns to the stepwhere the procedure was originally initiated, as the process hasdetermined that the incoming buy order is not “too executable.”

Returning to step 534, if, however, the incoming buy order's displayprice is higher than the derived MaxBuyPrice parameter, then theincoming buy order is “too executable,” i.e., is priced too far throughthe NBO. Accordingly, the incoming buy order is not allowed to execute,and must either be canceled or repriced depending on the business rulesof the market center 20. In step 538, if the rules determine that theorder must be canceled, then the process continues to step 540, where itcancels the incoming buy order and terminates in step 542, as indicated.If, however, in step 538 the business rules of the market center 20determine that the incoming buy order should be repriced lessaggressively instead of being canceled, then the process continues tostep 544, where it caps the display price of the incoming buy order atthe derived MaxBuyPrice parameter. The process continues to step 546,where it checks if the incoming buy order's capped display price isequal to the incoming buy order's capped discretionary price. If theincoming order is a discretionary order and the two prices are equalbecause both have been capped, then the process continues to step 548,where it removes the discretionary price from the incoming buy order,and the process continues to step 550. In step 550, the process returnsto the step where it was originally initiated, because the repriced buyorder is no longer “too executable” and is eligible for furtherprocessing. Returning to step 546, the process also continues to step550 if the incoming buy order is not a discretionary order, as it willnot include a discretionary price.

The LMM Guaranteed Offer Process

Referring now to FIG. 6, the LMM Guaranteed Offer Process isillustrated. At step 600, the process is initiated. At step 602, theprocess retrieves the lead market maker's offer. In step 604, theprocess checks if the lead market maker's offer is at the NBO price. Ifthe lead market maker's offer is inferior to the NBO, then the leadmarket maker is not entitled to guaranteed participation with theincoming buy order, and the process continues to step 606, where itreturns to the step where it was originally initiated.

Returning to step 604, if, however, the lead market maker's offer is atthe NBO, then the lead market maker is entitled to guaranteedparticipation with the incoming buy order. The process proceeds to step608, where it checks if the incoming buy order's size is greater thantwo contracts. If it is less than or equal to two contracts, then theprocess continues to step 609, where it matches the incoming buy orderwith one contract of the lead market offer, at the NBO price. It doesthis by generating an immediate or cancel (“IOC”) sell pseudo-order onbehalf of the underlying lead market maker offer, and executing theincoming buy order against the sell pseudo-order. After executing thesell pseudo-order, the order matching engine notifies the market makerquote engine 32 b of the quantity of contracts that executed (onecontract) so that it can decrement the lead market maker's offer.

Then at step 610, the process checks if the incoming buy order still hasone contract available to trade. If it does not, then the processterminates in step 612 as indicated. If it does, then the processcontinues to step 611, where it matches the single remaining contract ofthe incoming buy order with one contract of the best displayed offer.The best displayed offer is the sell order or quote with the highestranking in the Display Order Process according to price/time priority.The process terminates in step 612 as indicated.

Returning to step 608, if, however, the incoming buy order has more thantwo contracts available to execute, then the process, in thisembodiment, determines if there are any customer orders that areeligible to execute ahead of the lead market maker's offer. Accordingly,the process proceeds to step 614, where it checks if there are anydisplayed customer sell orders at the NBO. It should be noted that acustomer discretionary sell order whose displayed price is at the NBOqualifies as an eligible displayed order. However, if the discretionaryprice is at or better than the NBO but the display price is inferior tothe NBO, then the customer discretionary sell order is not eligible toparticipate in the LMM Guarantee Process.

If there are no displayed customer sell orders at the NBO, then the leadmarket maker is entitled to participate immediately with the incomingbuy order. The process proceeds to step 632, where it retrieves astored, configurable guaranteed allocation parameter determined by themarket center's business rules (“LMMGuaranteedPercent”). At step 634,the process computes the maximum quantity of contracts that the leadmarket maker is guaranteed for execution (“LMMGuaranteedAllocation”) bymultiplying the remaining (“Leaves”) quantity of the incoming buy orderby the LMMGuaranteedPercent parameter, and rounding the result down tothe nearest integer value if necessary. In step 638, the process matchesthe incoming buy order with the lead market maker's offer, at the NBOprice, up to the lesser of the computed LMMGuaranteedAllocation size andthe lead marker maker offer size. It does this by generating an IOC sellpseudo-order on behalf of the underlying lead market maker offer, andexecuting the incoming buy order against the sell pseudo-order. Afterexecuting the sell pseudo-order, the order matching engine notifies themarket maker quote engine 32 b of the quantity of contracts thatexecuted so that it can decrement the lead market maker's offer.

In step 642, the process checks if the incoming buy order still has anycontracts available to trade. If the incoming buy order has beencompletely executed, then the process terminates in step 644 asindicated. However, if the incoming buy order still has contractsavailable to trade, then the process returns to the step where it wasoriginally initiated, so that the incoming buy order can continue toexecute against other offers if possible. The LMM Guaranteed OfferProcess is completed, and any remaining quantity of the incoming buyorder is released to the Display Order Process.

Returning to step 614, if, however, there are displayed customer sellorders at the NBO, then the process continues to step 616, where itretrieves the timestamp assigned to the lead market maker's offer (thetime assigned by the market maker quote engine 32 b) and stores it inthe parameter “LMMOfferTimestamp.” In step 618, the process retrievesthe earliest displayed customer sell order at the NBO. In step 620, theprocess compares the timestamp of the retrieved customer sell order withthe LMMOfferTimestamp parameter, and if the customer sell order precededthe lead market maker's offer, then the process continues to step 622,where it matches the incoming buy order with the retrieved customer sellorder at the NBO price.

In step 624, the process checks if the incoming buy order still hascontracts available to trade. If it does not, then the processterminates in step 626 as indicated. If it does, then the processcontinues to step 628, where it checks if there are any additionaldisplayed customer sell orders priced at the NBO. If there areadditional customer orders, then in step 630, the process retrieves thenext earliest displayed customer sell order at the NBO and returns tostep 620, where it checks if the newly-retrieved customer sell order wasreceived prior to the lead market maker's offer. It repeats this processuntil all customer sell orders with price/time priority over the leadmarket maker's offer have been matched, unless the incoming buy order isexhausted first.

Returning to step 620, if, however, the timestamp of the retrievedcustomer sell order is not lower than the LMMOfferTimestamp, then thecustomer order was not received prior to the lead market maker's offer,and is therefore not eligible to execute in the LMM Guaranteed OfferProcess. In this case, the process proceeds to step 632, and executesthe lead market maker guaranteed allocation according to steps 632through 644 (or 646) as described above.

Returning to step 628, if, however, there are no additional displayedcustomer sell orders at the NBO, then the process also proceeds to step632 at this point, and executes the lead market maker guaranteedallocation according to steps 632 through 644 (or 646) as describedabove.

The Directed Order Process

Referring now to FIGS. 7A-7B, the Directed Order Process is illustrated.When the market center 20 receives a directed order, it must firstdetermine if the order sending firm 26 is permissioned to direct ordersto the designated market maker firm 31. At step 700, the process isinitiated. At step 702, the process sets the parameter designated as“OSF” to the order sending firm identification (“ID”) included on theincoming directed order. Then, at step 704, the process retrieves adesignated market maker/order sending firm (“DMM/OSF”) permissionstable, similar to the exemplary one depicted in FIG. 7B.

At step 706, the process checks if the incoming directed order includesthe ID of a designated market maker, i.e., a specific market maker firmthat is the intended recipient of this directed order. If a designatedmarket maker is not specified, then the process continues to step 712,where it consults the DMM/OSF permissions table to see if a defaultdesignated market maker has been established for this order sendingfirm. If no default market maker has been established in the DMM/OSFpermissions table, then the incoming order cannot execute in theDirected Order Process, but it may be able to execute in one of the LMMGuarantee Processes instead. Accordingly, the process continues to step713, where it checks if the incoming order is a buy or sell. If theincoming order is a buy order, then the process continues to step 714,where it initiates the LMM Guaranteed Offer Process. After the LMMGuaranteed Offer Process is complete, the process then continues to step730, where it returns to the step where the routine was originallyinitiated. If, however, the incoming order is a sell order, then theprocess continues to step 715, where it initiates the LMM Guaranteed BidProcess. After the LMM Guaranteed Bid Process is complete, the processthen continues to step 732, where it returns to the step where theroutine was originally initiated.

Referring again to step 706, if the directed order includes the ID of adesignated market maker, then the process, at step 708, assigns thedesignated market maker ID to the parameter “DMM.” At step 710, theprocess consults the DMM/OSF permissions table to determine if a ruleexists for this DMM/OSF pair. If a rule does not exist, then this ordersending firm 26 is not permissioned to send directed orders to thisdesignated market maker. In this case, the incoming order cannot executein the Directed Order Process, but it may be able to execute in a LMMGuarantee Process instead. Accordingly, the process continues to step713 where it checks if the incoming order is a buy order or a sell orderand then proceeds as described in the steps above.

Referring again to step 710, however, if a rule does exist for theDMM/OSF pair, then this order sending firm 26 is permissioned to senddirected orders to the designated market maker 31. That being the case,the process continues to step 718, where it checks if the incomingdirected order is a buy order or a sell order.

Referring again to step 712, if the process determines that a defaultdesignated market maker exists for the order sending firm sending theorder, then the process, at step 716 sets the parameter designated as“DMM” to the default market maker ID and continues to step 718. At step718, the process determines whether the incoming directed order is a buyorder or a sell order. If the directed order is a buy order, then theprocess proceeds to step 720, where the DMM Guaranteed Offer Process isinitiated, and the process proceeds to step 800 (FIG. 8). After the DMMGuaranteed Offer Process is complete, the process proceeds to step 722where it returns to the step where the routine was originally initiated.If, on the other hand, the directed order is a sell order, then theprocess proceeds to step 724, where the DMM Guaranteed Bid Process isinitiated, and the process proceeds to step 1800 (FIG. 15). After theDMM Guaranteed Bid Process is complete, the process proceeds to step 726where it returns to the step where the routine was originally initiated.

The DMM Guaranteed Offer Process

Where the process has determined that an incoming buy order was sent byan order sending firm 26 that is permissioned to send directed orders toa market maker firm 31, the DMM Guaranteed Offer Process is activated asindicated at step 800 (FIG. 8). FIG. 8 illustrates a routine wherein theorder matching engine 21 executes the incoming directed buy order in theDirected Order Process, but only if the designated market maker's offeris at the NBO. The DMM Guaranteed Offer Process is very similar to thepreviously described LMM Guaranteed Offer Process, as the designatedmarket maker in this situation receives the same privileges as the leadmarket maker for the purpose of executing with the incoming directedorder.

At step 802, the process retrieves the designated market maker's offer.In step 804, the process checks if the designated market maker's offeris at the NBO price. If the designated market maker's offer is inferiorto the NBO, then the designated market maker is not entitled toguaranteed participation with the incoming directed buy order. However,the lead market maker may still be entitled to participate with theincoming order instead. Accordingly, the process continues to step 806,where the LMM Guaranteed Offer Process is activated, and the processproceeds to step 600 (FIG. 6).

Returning to step 804, if, however, the designated market maker's offeris at the NBO, then the designated market maker is entitled toguaranteed participation with the incoming order. The process proceedsto step 808, where, in this embodiment, it checks if the incomingdirected buy order's size is greater than two contracts. If it is lessthan or equal to two contracts, then the process continues to step 809,where it matches the incoming buy order with one contract of thedesignated market maker's offer, at the NBO price. It does this bygenerating an IOC sell pseudo-order on behalf of the underlyingdesignated market maker offer, and executing the incoming buy orderagainst the sell pseudo-order. After executing the sell pseudo-order,the order matching engine notifies the market maker quote engine 32 b ofthe quantity of contracts that executed (one contract) so that it candecrement the designated market maker's offer.

In step 810, the process checks if the incoming buy order still has onecontract available to trade. If it does not, then the process terminatesin step 812 as indicated. If it does, then the process continues to step811, where it matches the single remaining contract of the incoming buyorder with one contract of the best displayed offer. The best displayedoffer is the sell order or quote with the highest ranking in the DisplayOrder Process according to price/time priority. The process terminatesin step 812 as indicated.

Returning to step 808, if, however, the incoming directed buy order hasmore than two contracts available to execute, then the process mustdetermine if there are any customer orders that are eligible to executeahead of the designated market maker's offer. Accordingly, it proceedsto step 814, where it checks if there are any displayed customer sellorders at the NBO. It should be noted that a customer discretionary sellorder whose displayed price is at the NBO qualifies as an eligibledisplayed order. However, if the discretionary price is at or betterthan the NBO but the display price is inferior to the NBO, then thecustomer discretionary sell order is not eligible to participate in theDMM Guarantee Process.

If there are no displayed customer sell orders at the NBO, then thedesignated market maker is entitled to participate immediately with theincoming directed buy order. The process proceeds to step 832, where itretrieves a stored, configurable guaranteed allocation parameterdetermined by the market center's business rules(“DMMGuaranteedPercent”). In step 834, the process computes the maximumquantity of contracts that the designated market maker is guaranteed forexecution (“DMMGuaranteedAllocation”) by multiplying the remaining(“Leaves”) quantity of the incoming directed buy order by theDMMGuaranteedPercent parameter, and rounding the result down to thenearest integer value if necessary. In step 838, the process matches theincoming buy order with the designated market maker's offer, at the NBOprice, up to the lesser of the computed DMMGuaranteedAllocation size andthe designated market maker offer size. It does this by generating anIOC sell pseudo-order on behalf of the underlying designated marketmaker offer, and executing the incoming buy order against the sellpseudo-order. After executing the sell pseudo-order, the order matchingengine notifies the market maker quote engine 32 b of the quantity ofcontracts that executed so that it can decrement the designated marketmaker's offer.

In step 842, the process checks if the incoming directed buy order stillhas any contracts available to trade. If the incoming directed buy orderhas been completely executed, then the process terminates in step 844 asindicated. However, if the incoming directed buy order still hascontracts available to trade, then the process continues to step 846,where it returns to the step where it was originally initiated, so thatthe incoming buy order (no longer directed) can continue to executeagainst other offers if possible. The DMM Guaranteed Offer Process iscompleted, and any remaining quantity of the incoming buy order isreleased to the Display Order Process.

Returning to step 814, if, however, there are displayed customer sellorders at the NBO, then the process continues to step 816, where itretrieves the timestamp assigned to the designated market maker's offer(the time assigned by the market maker quote engine 32 b) and stores itin the parameter “DMMOfferTimestamp.” In step 818, the process retrievesthe earliest displayed customer sell order at the NBO. In step 820, theprocess compares the timestamp of the retrieved customer sell order withthe DMMOfferTimestamp parameter, and if the customer sell order precededthe designated market maker's offer, then the process continues to step822, where it matches the incoming directed buy order with the retrievedcustomer sell order at the NBO price.

In step 824, the process checks if the incoming directed buy order stillhas contracts available to trade. If it does not, then the processterminates in step 826 as indicated. If it does, then the processcontinues to step 828, where it checks if there are any additionaldisplayed customer sell orders priced at the NBO. If there areadditional customer orders, then in step 830, the process retrieves thenext earliest displayed customer sell order at the NBO and returns tostep 820, where it checks if the newly-retrieved customer sell order wasreceived prior to the designated market maker's offer. It repeats thisprocess until all customer sell orders with price/time priority over thedesignated market maker's offer have been matched, unless the incomingdirected buy order is exhausted first.

Returning to step 820, if, however, the timestamp of the retrievedcustomer sell order is not lower than the DMMOfferTimestamp, then thecustomer order was not received prior to the designated market maker'soffer, and is therefore not eligible to execute in the Directed OrderProcess. In this case, the process proceeds to step 832, and executesthe designated market maker guaranteed allocation according to steps 832through 844 (or 846) as described above.

Returning to step 828, if, however, there are no additional displayedcustomer sell orders at the NBO, then the process also proceeds to step832, and executes the designated market maker guaranteed allocationaccording to steps 832 through 844 (or 846) as described above.

Discretionary Sell Orders Step Up to NBO Process

Referring now to FIG. 9, the Discretionary Sell Orders Step Up to NBOProcess is illustrated. The Discretionary Sell Orders Step Up to NBOProcess allows resting discretionary sell orders to step up to the NBOprice to execute against an incoming buy order that would otherwise beposted, routed, canceled, hidden, or repriced to not lock/cross the NBO.The routine is initiated at step 900 after it has already beendetermined that one or more eligible discretionary sell orders are onthe order book 29 a.

In step 902, the process retrieves the discretionary sell order with thehighest ranking at the NBO price. In step 904, it checks if the incomingbuy order's Leaves quantity is greater than or equal to the retrieveddiscretionary sell order's minimum discretion size. If the sell orderdoes not include a minimum discretion size, then its value defaults tozero, and the incoming buy order's size is automatically greater. If,however, the discretionary sell order does include a minimum discretionsize and the buy order's size is not at least its equal, then theretrieved discretionary sell order cannot use its discretion to matchthe incoming buy order, and the process continues to step 916, where itchecks if there are any other resting discretionary sell orders thatmight be eligible instead. If there are no other additionaldiscretionary sell orders that can step up to the NBO, then the processcontinues to step 918, where it returns to the step where it wasoriginally initiated.

Returning to step 904, if, however, the incoming buy order does havequantity at least equal to the discretionary sell order's minimumdiscretion size, then the process continues to step 910, where itmatches the incoming buy order with the retrieved discretionary sellorder, at the price of the NBO. In step 912, the process checks if theincoming buy order still has any quantity remaining. If it does not,then the process continues to step 914, where it terminates asindicated. If it does still have available quantity, then the processcontinues to step 916 where it checks if there are any additionaldiscretionary sell orders that can step up to the NBO to trade.

If there are no additional orders, then the process continues to step918, where it returns to the step where the procedure was originallyinitiated. If, however, there are additional eligible discretionary sellorders, then the process continues to step 920, where it retrieves thenext discretionary sell order with the highest ranking at the NBO price.The process returns to step 904, where it repeats the process ofchecking if the retrieved discretionary sell order can execute with theincoming buy order, or whether the process must retrieve the next-bestdiscretionary sell order instead. It repeats the steps described aboveuntil the incoming buy order is completely matched, or until there areno more resting discretionary sell orders that can trade with theincoming buy order.

Incoming Buy Order Received

Referring now to FIGS. 10A-10B, the process is illustrated where theorder matching engine 21 receives an incoming buy order withoutdiscretion. As in the previous FIGS. 4A-4B which illustrate a routinefor receiving an incoming discretionary buy order, the routineillustrates the execution and/or routing of a marketable incoming buyorder. The incoming buy Order attempts to execute against as manydisplayed orders and market maker quotes as appropriate, but at thepoint where the incoming buy order is about to be posted, routed, orcanceled, then the process looks for resting discretionary sell ordersthat can step up to execute. Additionally, if the incoming buy order isan order type that can execute contemporaneously beyond the NBO aftersatisfying all away markets quoting at the NBO, e.g., using the “tradeand ship” exception, then the process looks for resting sell orders atone tick inferior to the NBO, including resting discretionary sellorders that can step up to one tick inferior to the NBO.

At step 1000, the incoming buy order is received. In step 1001, theprocess retrieves the NBBO, and in step 1002, it checks if the incomingbuy order is less than the NBB. If the price is lower than the NBB, thenthe order is not executable, and accordingly the process continues tostep 1004, where it posts or cancels the incoming buy order according tothe rules of the order type, and the process terminates in step 1005.If, however, the incoming buy order is not less than the NBB, then theprocess continues to step 1006 to determine if it is greater than theNBO. If the price is higher than the NBO, then the process continues tostep 1008, where it initiates the Too-Executable Buy Order CheckProcess, and proceeds to step 500 in FIG. 5. If the incoming buy orderis not canceled in the Too-Executable Buy Order Check Process, i.e., itis not determined to be too executable, then the process continues tostep 1011, where it creates a virtual consolidated order and quote listfor the option series by combining the away market BBO book 25 a, themarket maker quote book 33 a, and the internal order book 29 a, andranking the orders and quotes according to price/display/time priority,but with a preference for displayed trading interest over away marketquotes at the same price. The process then continues to step 1030.

Returning to step 1006, if the incoming buy order is not greater thanthe NBO, then the process continues to step 1010, where it checks if itis less than the NBO. If it is neither greater than nor less than theNBO, then it is equal to the NBO, and the process continues to step1011, where it creates a virtual consolidated order and quote list forthe option series. The process then continues to step 1030 as theincoming buy order is marketable at the NBO.

Returning to step 1010, if, however, the incoming buy order is less thanthe NBO, then it is priced between the spread and is not executableunless there are resting discretionary sell orders that can step up tomatch it. Accordingly, the process continues to step 1012, where itchecks if any resting discretionary sell orders have a discretionaryprice that is less than or equal to the incoming buy order's price. Ifthere are no such eligible discretionary sell orders, then the processcontinues to step 1026, where it posts or cancels the incoming buy orderaccording to the rules of the order type, and the process terminates instep 1028 as indicated.

Returning to step 1012, if there are resting discretionary sell ordersthat can step up to the buy order's price, then the process continues tostep 1014, where it retrieves the discretionary sell order with thehighest ranking at the incoming buy order's price. For example, if thebuy order's price is 1.95, then all discretionary sell orders that canstep up to 1.95 are evaluated, and the order with the highest ranking atthe price of 1.95 is retrieved. The process continues to step 1016,where it checks if the incoming buy order's size is greater than orequal to the resting discretionary sell order's minimum discretion size.If the sell order does not include a minimum discretion size, then itsvalue defaults to zero and the incoming buy order's size isautomatically greater. If the sell order does include a minimumdiscretion size, then the incoming buy order's size must be at least itsequal. If the resting discretionary sell order's minimum discretion sizeis higher, then the incoming buy order does not have sufficient size,and the process continues to step 1024, where it checks if there areadditional resting discretionary sell orders that can step up to theincoming buy order's price. If there are, the process returns to step1014, where it retrieves the next highest-ranked discretionary sellorder, and repeats the process of checking its minimum discretion sizeagainst the incoming buy order size.

Returning to step 1016, if, however, the incoming buy order hassufficient size to execute against the retrieved discretionary sellorder, then the process continues to step 1018, where it matches theincoming buy order and the resting discretionary sell order, at theprice of the incoming buy order. Accordingly, the discretionary sellorder steps up only as high as is necessary to execute. The processcontinues to step 1020, where it checks if the incoming buy order stillhas quantity remaining. If it does not, then the process terminates instep 1022 as indicated. If, however, the incoming buy order still hasavailable quantity, then the process continues to step 1024, where itchecks if there are additional resting discretionary sell orders thatcan step up to execute against it. The process continues until theincoming buy order is depleted, or until there are no more discretionarysell orders that can execute against it, in which case it is posted orcanceled according to its order type, as described above.

If in the process of executing the procedures described above, theprocess determines that the incoming buy order is executable against theNBO, then at step 1030, it checks if the issue has any assigned marketmakers. If it does, then the process continues to step 1032, where itchecks whether the incoming buy order is a directed order. If it is adirected order, then the process continues to step 1034, where itinitiates the Directed Order Process and proceeds to step 700 in FIG.7A. Returning to step 1032, if, however, the incoming buy order is not adirected order, then the process continues to step 1036, where itinitiates the LMM Guaranteed Offer Process and proceeds to step 600 inFIG. 6.

Regardless of whether the incoming buy order participates in theDirected Order Process or the LMM Guaranteed Offer Process or in neitherprocess (if the applicable market maker was not quoting at the NBO), theprocess continues to step 1038, where it checks if the incoming buyorder is still greater than or equal to the NBO. By way of explanation,it may have exhausted the NBO if it executed in a market makerguaranteed entitlement process. If the incoming buy order is notexecutable at the present NBO, then the process returns to step 1012,where it checks if there are any resting discretionary sell orders thatcan step up to the incoming buy order's price. By way of explanation,the process is now looking for resting discretionary sell orders at thispoint because if displayed sell orders or market maker offers canexecute against the incoming buy order, then those orders/quotes havepriority over any resting discretionary sell orders that must usediscretion to execute. The discretionary sell orders are allowed to stepup now only because all trading interest at the previous NBO has beendepleted by trading and the incoming buy order would otherwise be postedor canceled at this point, as it is currently priced between the spread.The process continues to steps 1012 through 1028, as previouslydescribed in detail, until the incoming buy order is either completelymatched or else is posted or canceled.

Returning to step 1038, if, however, the incoming buy order is stillgreater than or equal to the NBO, then the process continues to step1042, where it checks if the market center 20 is at the NBO or not. Ifit is at the NBO, then the process continues to step 1044, where itretrieves the displayed sell order or market maker offer with thehighest ranking in the Display Order Process. If it is a market makeroffer, then in step 1045, the process generates an IOC sell pseudo-orderon behalf of the underlying market maker offer. In step 1046, it matchesthe incoming buy order and the sell order or pseudo-order, at the NBOprice. If the sell order is a pseudo-order, then the process alsonotifies the market maker quote engine 32 b of the quantity of contractsthat were executed so that it can decrement the market maker offer asappropriate.

In step 1048, the process checks if the incoming buy order still has anyquantity remaining, and if it does not, the process continues to step1066, where it terminates as indicated. If, however, the incoming buyorder still has quantity available, then the process returns to step1038, where it repeats the procedure described above for determining ifthe incoming buy order can execute against additional posted sell ordersor market maker offers.

Returning to step 1042, if, however, the market center 20 is not at theNBO, then the incoming buy order may be required to route to one or moreaway markets at the NBO. However, before any such routing decisionoccurs, the process first checks at step 1050 if there are any restingdiscretionary sell orders that can step up to the NBO to execute withthe incoming buy order. If there are such eligible orders, then theprocess continues to step 1052, where it initiates the DiscretionarySell Orders Step Up to NBO Process and proceeds to step 900 in FIG. 9.If the incoming buy order still has quantity available after executingwith the resting discretionary sell orders in FIG. 9, then the processcontinues to step 1054. The process also continues to step 1054 if atstep 1050 the process determines that there are no resting discretionarysell orders that can step up to the NBO.

In step 1054, the process checks if the incoming buy order should berouted off the market center 20. It is possible that the incoming buyorder is an order type that cannot be routed (e.g., anExchange-Restricted Order, or an IOC order). It is also possible thatthe incoming buy order type can be routed, but all the away marketcenters quoting at the NBO have already been fully satisfied by priororders routed over the linkage. If the incoming buy order should notroute, then the process continues to step 1064, where it posts, queues,cancels, hides, or reprices the incoming buy order according to therules for the order type, and the process terminates in step 1066 asindicated.

Returning to step 1054, if, however, the process determines that theincoming buy order should be routed, then the process continues to step1056, where it releases the incoming buy order to the routing process,which routes the incoming buy order to each eligible away market centerquoting at the NBO, at a quantity up to its unsatisfied offer size, andat a price equal to the NBO. After routing to all eligible marketcenters, the process continues to step 1058, where it checks if theincoming buy order still has quantity remaining. If it does not, theprocess continues to step 1066, where it terminates as indicated. If,however, the incoming buy order does still have quantity available, thenthe process continues to step 1060, where it checks if the incoming buyorder type is allowed to execute beyond the NBO after it has satisfiedthe NBO. For example, sweep limit orders are allowed to execute beyondthe NBO. If the incoming buy order type is not allowed to execute beyondthe NBO, then the process continues to step 1064 where the remainder ofthe incoming buy order is posted, queued, canceled, or repricedaccording to the rules of the order type, and the process terminates instep 1066. If, however, the incoming buy order type is allowed toexecute beyond the NBO, then the process continues to step 1062, whereit initiates the Posted Sell Order Trade-and-Ship Price Check Processand proceeds to step 1100 in FIG. 11. After attempting to execute inFIG. 11, if the incoming buy order is not fully matched, then theremaining quantity is posted, queued, canceled, hidden, or repriced instep 1064 according to the rules of the order type, and the processterminates in step 1066.

Posted Sell Order Trade-and-Ship Price Check Process

Referring now to FIG. 11, the Posted Sell Order Trade-and-Ship PriceCheck Process is illustrated. The Posted Sell Order Trade-and-Ship PriceCheck Process is a process that executes when an incoming buy order hasbeen determined to be eligible to execute against resting sell orderspriced at one tick inferior to the NBO contemporaneously with satisfyingall away markets offering at the NBO, for example, in accordance withthe “trade and ship” marketplace exception. In this embodiment, restingdiscretionary sell orders that can step up to one tick inferior to theNBO are also allowed to execute against the incoming buy order.

The process is initiated at step 1100 and at step 1102, the processcomputes the price that is one tick inferior to the NBO (the“TradeAndShipPrice”) by adding one minimum price increment (tick) to thecurrent NBO price. In step 1104, it retrieves the displayed sell orderwith the highest ranking in the Display Order Process. In step 1106, itchecks if the retrieved sell order's price is equal to the computedTradeAndShipPrice, i.e., if the retrieved sell order is one tick worsethan the NBO. If it is, the process continues to step 1108, where itmatches the incoming buy order and the retrieved sell order at thecomputed TradeAndShipPrice.

In step 1110, the process checks if the incoming buy order has anyquantity remaining. If it does not, then the process terminates in step1112 as indicated. If it does still have available quantity, then theprocess continues to step 1114 where it retrieves the next-bestdisplayed sell order and returns to step 1106, where it repeats theprocess of checking if the retrieved sell order's price is equal to thecomputed TradeAndShipPrice. If it is, the process matches the orders atthe TradeAndShipPrice, and continues according to the steps describedabove until the incoming buy order is completely matched or until thereare no additional displayed sell orders at the TradeAndShipPrice, asdescribed next.

Returning to step 1106, if, however, the retrieved displayed sell orderhas a price that is inferior to the computed TradeAndShipPrice, then theprocess continues to step 1116, where it checks if there are any restingdiscretionary sell orders that can step up to the computedTradeAndShipPrice. If there are no such eligible orders, then theprocess continues to step 1117, where it returns to the step where itwas originally initiated, back to step 1062 (FIG. 10B). If, however,there are resting discretionary sell orders that can step up to theTradeAndShipPrice, then the process continues to step 1118, where itretrieves the discretionary sell order with the highest ranking at theTradeAndShipPrice. For example, if the NBO is 2.00 and this issue has atick of 0.05 at this price level, then the TradeAndShipPrice is 2.05,and the discretionary sell order with the highest ranking at the priceof 2.05 is retrieved.

The process continues to step 1120, where it checks if the incoming buyorder's leaves quantity is greater than or equal to the retrieveddiscretionary sell order's minimum discretion size. If the retrievedsell order does not have a minimum discretion size, then its valuedefaults to zero, and the incoming buy order's size is automaticallygreater. If, however, the retrieved sell order does include a minimumdiscretion size and the incoming buy order's size is not at least equalto it, then the process continues to step 1128, where it checks if thereare any other resting discretionary sell orders that can step up totrade with the incoming buy order instead.

If there are none, then the process continues to step 1130, where itreturns to the step where it was originally initiated, back to step 1062(FIG. 10B). If, however, there are additional discretionary sell ordersthat can step up to the computed TradeAndShipPrice, then the processcontinues to step 1132, where it retrieves the next-best discretionarysell order and then returns to step 1120 to repeat the process describedabove for determining if the orders are eligible to match. It continuesthis process until the incoming buy order is completely matched or untilthere are no more discretionary sell orders that are eligible to trade.

Returning to step 1120, if the incoming buy order has sufficient size toat least equal the discretionary sell order's minimum discretion size,then the process continues to step 1122, where it matches the incomingbuy order with the retrieved discretionary sell order, at the computedTradeAndShipPrice. In step 1124, the process checks if the incoming buyorder still has any remaining quantity, and if it does not, itterminates in step 1126 as indicated. If the incoming buy order stillhas available quantity, then the process continues to step 1128, whereit checks if there are additional resting discretionary sell orders thatcan step up to execute. It continues according to the steps describedabove until the incoming buy order is completely matched or until thereare no more discretionary sell orders that are eligible to trade.

It should be noted that if market maker offers priced at one tickinferior to the NBO are also allowed to execute with the incoming buyorder according to marketplace rules, then at step 1104 and step 1114,the process will retrieve the best displayed sell order or market makeroffer, as determined by their ranking in the Display Order Process. Inthe case of a market maker offer, the process generates an IOC sellpseudo-order on behalf of the market maker offer, executes the incomingbuy order against the sell pseudo-order at the TradeAndShipPrice, andthen notifies the market maker quote engine 32 b of the executedquantity so that it can decrement the market maker offer as appropriate.

Incoming Discretionary Sell Order Received

Referring to FIGS. 12A-12B, in this embodiment, the order matchingengine 21 receives an incoming discretionary sell order as indicated atstep 1400, and determines whether the order can execute. If the incomingdiscretionary sell order is marketable against the NBB, then the processdetermines if the incoming discretionary sell order is eligible toexecute first in a guaranteed entitlement process and, if it is,processing the incoming discretionary sell order in the guaranteedentitlement process. The process then releases any unexecuted portion ofthe order to the Display Order Process for additional matchingopportunities. If the incoming discretionary sell order is notmarketable against the NBB, it may be able to execute between the spreadif there are any resting discretionary buy orders on the internal orderbook 29 a that can step up to match it. If, however, the incomingdiscretionary sell order cannot execute, then it ranks the order in theinternal order book 29 a in price/time priority according to its displayprice. The displayed portion of the discretionary sell order resides inthe Display Order Process whereas the discretionary price resides in theWorking Order Process.

In step 1402, the process retrieves the NBB, and in step 1404, it checksif the incoming discretionary sell order's display price is less than orequal to the NBB. If the incoming discretionary sell order's displayprice is not marketable, i.e., its price is higher than the NBB, thenthe process continues to step 1406, where it checks if the incomingdiscretionary sell order's discretionary price is less than or equal tothe NBB. If the incoming discretionary sell order's discretionary priceis also not marketable, i.e., its price is also higher than the NBB,then the process continues to step 1407, where it checks if the incomingdiscretionary sell order's discretionary price is less than or equal tothe NBO.

If the discretionary price is higher than the NBO, then the order is notexecutable as it would cause a trade-through violation, and thereforethe order must be ranked in the internal order book 29 a. The processcontinues to step 1460, where it ranks the incoming discretionary sellorder in the Display Order Process according to the price/time priorityof its display price. In step 1462, the process stores the incomingdiscretionary sell order's discretionary price in the Working OrderProcess. By way of explanation, the discretionary sell order has onlyone position in the internal order book 29 a. The discretionary price isnot treated as a separate order. In step 1464, the process publishes thediscretionary sell order's display price to the public order book, andthe process terminates in step 1466 as indicated.

Returning to step 1407, if, however, the incoming discretionary sellorder's discretionary price is less than or equal to the NBO, then theincoming order may be executable if there are eligible discretionary buyorders on the order book 29 a. The process continues to step 1408, whereit checks if there are any resting discretionary buy orders whosediscretionary price is greater than or equal to the incoming sellorder's discretionary price. If there are such resting discretionary buyorders, then in step 1422, the process retrieves the discretionary buyorder with the highest ranking in the internal order book 29 a at theincoming discretionary sell order's discretionary price. For example, ifan incoming sell order has a discretionary price of 2.10, then theprocess evaluates all the discretionary buy orders that can step up tothe price of 2.10 and then retrieves the discretionary buy order withthe highest ranking at the price of 2.10.

In step 1424, the process checks if the incoming discretionary sellorder's size is greater than or equal to the resting buy order's minimumdiscretion size (which defaults to zero if no minimum discretion size isspecified). In this embodiment, if the resting discretionary buy orderdoes include a minimum discretion size and the incoming discretionarysell order does not have sufficient size to fill it, then the orderscannot execute, and the process continues to step 1434, where it checksif there are any additional discretionary buy orders that can step up totrade with the incoming discretionary sell order.

Returning to step 1424, if, however, the incoming discretionary sellorder's size is greater than or equal to the resting discretionary buyorder's minimum discretion size (if no minimum discretion size isspecified, then the sell order size is automatically greater), then theprocess continues to step 1428, where it matches the incomingdiscretionary sell order and the resting discretionary buy order at theincoming discretionary sell order's discretionary price. Accordingly,the resting discretionary buy order only used as much discretion as wasrequired to execute.

In step 1430, the process checks if the incoming discretionary sellorder still has any quantity remaining. If it does not, then the processterminates in step 1432 as indicated. If, however, the incomingdiscretionary sell order still has available contracts, then the processcontinues to step 1434, where it checks if there are any additionalresting discretionary buy orders that can step up to trade with theincoming discretionary sell order.

If additional eligible orders are indeed on the order book 29 a, thenthe process returns to step 1422, where it retrieves the nexthighest-ranked discretionary buy order and repeats the steps describedabove until the incoming discretionary sell order is fully matched orelse is no longer executable and must be posted. Returning to step 1434,if there are no additional discretionary buy orders that can step up tomatch the incoming discretionary sell order, then the process continuesto steps 1460 through 1466, where it posts the remainder of the incomingdiscretionary sell order as described above and then terminates.

Returning to step 1404, if, however, the incoming discretionary sellorder's display price is less than or equal to the NBB, then the processcontinues to step 1410, where the “Too-Executable Sell Order CheckProcess” is initiated at step 1500 (FIG. 13). The process also continuesto step 1410 if at step 1406 the process determines that the incomingdiscretionary sell order's discretionary price is less than or equal tothe NBB. If the incoming discretionary sell order is not canceled by theToo-Executable Sell Order Check Process as described in detail below,then the process continues to step 1411, where it creates a virtualconsolidated order and quote list for the option series. The processcontinues to step 1412, where it checks if the option series has anyassigned market makers. If it does, then the process continues to step1414, where it checks whether the incoming discretionary sell order is adirected order. If the incoming discretionary sell order is a directedorder, then the process continues to step 1416 where the “Directed OrderProcess” is initiated in step 700 (FIG. 7A). If, however, the incomingdiscretionary sell order is not a directed order, then the processproceeds to step 1418 where the “LMM Guaranteed Bid Process” isinitiated instead in step 1600 (FIG. 14).

Regardless of whether the incoming discretionary sell order executes inthe Directed Order Process, in the LMM Guarantee Process or in neitherprocess (if the applicable market maker is not quoting at the NBB and istherefore ineligible for a guaranteed entitlement), if the incomingdiscretionary sell order still has quantity available to trade, then theprocess continues to step 1436, where it checks if the incomingdiscretionary sell order's display price is less than or equal to theNBB. If it is, the process continues to step 1440. If it is not, thenthe process checks if the incoming discretionary sell order'sdiscretionary price is less than or equal to the NBB at step 1438, andif it is, the process continues to step 1440 at that point as well. If,however, at step 1438, the process determines that the incomingdiscretionary sell order's discretionary price is now greater than theNBB (which is possible if the order exhausted the NBB by trading), thenthe process continues to steps 1460 through 1466, where it posts theremainder of the incoming discretionary sell order as described aboveand then terminates.

Referring to step 1440, at step 1440, the process checks if the marketcenter 20 is at the NBB. If it is, then the process continues to step1442, where it retrieves the displayed buy order or market maker bidwith the highest ranking in the Display Order Process. If it is a marketmaker bid, then in step 1443, the process in this embodiment generatesan IOC buy pseudo-order on behalf of the underlying market maker bid. Instep 1444, it matches the incoming discretionary sell order and the buyorder or pseudo-order, at the NBB price. If the buy order is apseudo-order, then the process also notifies the market maker quoteengine 32 b of the quantity of contracts that were executed so that itcan decrement the market maker bid as appropriate.

In step 1446, the process checks if the incoming discretionary sellorder has any quantity remaining. If it does not, then the processcontinues to step 1458, where it terminates as indicated. If it doesstill have quantity available, then it returns to step 1436, where itrepeats the steps described above until the incoming discretionary sellorder is depleted or can no longer execute against the order book 29 a.

Returning to step 1440, if the market center 20 is not at the NBB, thenthe process may have to route the incoming discretionary sell order.However, in step 1448, the process first checks if there are any restingdiscretionary buy orders that can step up to the NBB price. If there areeligible resting discretionary buy orders, then the process continues tostep 1450, where the “Discretionary Buy Orders Step Up to NBB Process”activates and proceeds to step 1900 (FIG. 16).

Returning to step 1448, if, however, there are no eligible discretionarybuy orders, then the process continues to step 1452, where it checkswhether the incoming discretionary sell order should be routed off themarket center 20. Unless all the away market centers quoting at the NBBhave already been fully satisfied by prior routed orders, the processcontinues to step 1454, where it releases the incoming discretionarysell order to the routing process, which routes to any away marketcenter at the NBB whose bid size has not been fully satisfied, at thedisseminated NBB price.

The process then continues to step 1456, where it checks if the incomingdiscretionary sell order has any quantity remaining after it has routed.If it does not, then the process terminates in step 1458 as indicated.If, however, it still has quantity available, then the process continuesto steps 1460 through 1466, where it posts the remainder of the incomingdiscretionary sell order as described above and then terminates.Returning to step 1452, if the process determines that the incomingdiscretionary sell order should not be routed, then the processcontinues to steps 1460 through 1466, where it posts the remainder ofthe incoming discretionary sell order as described above and thenterminates.

Too-Executable Sell Order Check Process

Referring now to FIG. 13, the Too-Executable Sell Order Check Process isillustrated. The Too-Executable Sell Order Check Process determines ifan incoming sell order is “too executable,” i.e., is priced soaggressively that it exceeds a predefined allowable percentage throughthe published NBB quotation. In the preferred embodiment, the predefinedpercentage is stored as a configurable parameter “MaxPercentOffNBBO,”which caps the highest limit price allowed for an incoming sell orderbased on the current NBB. Additionally, the market center 20 may alsodecide to implement the “too executable” check not only for displayedprices, but also for discretionary prices. Even though discretionaryprices are not posted and therefore cannot cause a crossed NBBO to bedisseminated, the market center 20 may nevertheless decide to rejectoverly-aggressive discretionary prices.

In step 1500, the Too-Executable Sell Order Check Process is initiatedwhen the order matching engine 21 receives an incoming sell order thatis marketable. In step 1502, the process evaluates whether the check forexcessive discretion is enabled for the order type. If at step 1502 theprocess determines that the incoming sell order is a discretionary orderand that the check for excessive discretion is enabled, then itcontinues to step 1504, where it compares the incoming sell order'sdiscretionary price to the NBB. If the incoming sell order'sdiscretionary price is not less than the NBB, then the process continuesto step 1522, where it returns to the step where the procedure wasoriginally initiated, as the process has determined that the incomingsell order is not “too executable.” If the discretionary price is nottoo executable, then there is no reason to check if the display price istoo executable, as by definition the discretionary price must be moreaggressive than the display price, and this was previously checked bynormal order validation routines.

Returning to step 1504, if, however, the incoming sell order'sdiscretionary price is less than the NBB, then the process continues tostep 1506, where it retrieves the parameter “MaxPercentOffNBBO.” In step1508, the process computes the price interval allowed beyond the NBB foran incoming sell order (the “MaxPriceThruNBB” parameter) by multiplyingthe current NBB price by the MaxPercentOffNBBO. Accordingly, theMaxPriceThruNBB parameter is computed as the stored percentage parametertimes the NBB price, rounded down to the nearest tick if necessary. Forexample, if the NBB is 1.95 and the MaxPercentOffNBBO is 15%, then theMaxPriceThruNBB parameter is 0.2925, which would be rounded down to 0.25if the tick is a nickel at this price level. If the issue trades inpennies, then it would be rounded down to 0.29 instead. In step 1510,the process subtracts the computed MaxPriceThruNBB parameter from thecurrent NBB to derive the lowest valid discretionary price for theincoming sell order, i.e., the “MinSellPrice.”

In step 1512, the process compares the discretionary price of theincoming sell order to the derived MinSellPrice parameter. If theincoming sell order's discretionary price is not lower than theMinSellPrice parameter, then the incoming sell order is not “tooexecutable,” and is eligible for further processing. In this case, theprocess continues to step 1513, where it returns to the step where theprocedure was originally initiated, as the process has determined thatthe incoming sell order is not “too executable.”

Returning to step 1512, if, however, the incoming sell order'sdiscretionary price is lower than the derived MinSellPrice parameter,then the incoming sell order is presently “too executable,” i.e., ispriced too far through the NBB. Accordingly, the incoming sell ordermust either be canceled or repriced depending on the business rules ofthe market center 20. In step 1514, if the rules determine that theorder must be canceled, then the process continues to step 1518, whereit cancels the incoming sell order and terminates in step 1542, asindicated. If, however, in step 1514 the business rules of the marketcenter 20 determine that the incoming sell order should be repriced lessaggressively instead of being canceled, then the process continues tostep 1516, where it caps the discretionary price of the incoming sellorder at the derived MinSellPrice parameter. The process continues tostep 1524, as having determined that the incoming sell order's originaldiscretionary price was too executable, it must now also check if theincoming sell order's display price is also too executable and must besimilarly capped.

Referring now to step 1502, if, however, the process determines that thecheck for excessive discretion is not enabled for this incoming ordertype, then the process continues to step 1520, where it evaluateswhether the check for excessive marketability is enabled for theincoming order type, i.e., if its display price is too aggressive. Ifthe check for excessive marketability is not enabled, then the processcontinues to step 1522, where it returns to step where the procedure wasoriginally initiated. If, however, the check for excessive marketabilityis enabled, then the process continues to step 1524, where it comparesthe incoming sell order's display price to the NBB. If the sell order'sdisplay price is not lower, then the process continues to step 1526,where it returns to the step where the procedure was originallyinitiated, as the process has determined that the order is not tooexecutable. If, however, the process determines that the incoming sellorder's price is less than the NBB, then the process continues to step1528 instead.

In step 1528, the process retrieves the parameter “MaxPercentOffNBBO.”In step 1530, the process computes the price interval allowed beyond theNBB for an incoming sell order (the “MaxPriceThruNBB” parameter) bymultiplying the current NBB price by the MaxPercentOffNBBO parameter.Accordingly, the MaxPriceThruNBB parameter is computed as the storedparameter times the NBB price, rounded down to the nearest tick ifnecessary. In step 1532, the process subtracts the computedMaxPriceThruNBB parameter from the current NBB to derive the lowestvalid display price for the incoming sell order, i.e., the“MinSellPrice.”

In step 1534, the process compares the display price of the incomingsell order to the derived MinSellPrice parameter. If the incoming sellorder's price is not lower than the MinSellPrice, then the incoming sellorder is not “too executable,” and is eligible for further processing.In this case, the process continues to step 1536, where it returns tothe step where the procedure was originally initiated, as the processhas determined that the incoming sell order is not “too executable.”

Returning to step 1534, if, however, the incoming sell order's displayprice is lower than the derived MinSellPrice parameter, then theincoming sell order is “too executable,” i.e., is priced too far throughthe NBB. Accordingly, the incoming sell order is not allowed to execute,and must either be canceled or repriced depending on the business rulesof the market center 20. In step 1538, if the rules determine that theorder must be canceled, then the process continues to step 1540, whereit cancels the incoming sell order and terminates in step 1542, asindicated. If, however, in step 1538 the business rules of the marketcenter 20 determine that the incoming sell order should be repriced lessaggressively instead of being canceled, then the process continues tostep 1544, where it caps the display price of the incoming sell order atthe derived MinSellPrice parameter. The process continues to step 1546,where it checks if the incoming sell order's capped display price isequal to the incoming sell order's capped discretionary price. If theincoming order is a discretionary order and the two prices are equalbecause both have been capped, then the process continues to step 1548,where it removes the discretionary price from the incoming sell order,and the process continues to step 1550. In step 1550, the processreturns to the step where it was originally initiated, because therepriced sell order is no longer “too executable” and is eligible forfurther processing. Returning to step 1546, the process also continuesto step 1550 if the incoming sell order is not a discretionary order, asit will not include a discretionary price.

The LMM Guaranteed Bid Process

Referring now to FIG. 14, the LMM Guaranteed Bid Process is illustrated.At step 1600, the process is initiated. At step 1602, the processretrieves the lead market maker's bid. In step 1604, the process checksif the lead market maker's bid is at the NBB price. If the lead marketmaker's bid is inferior to the NBB, then the lead market maker is notentitled to guaranteed participation with the incoming sell order, andthe process continues to step 1606, where it returns to the step whereit was originally initiated.

Returning to step 1604, if, however, the lead market maker's bid is atthe NBB, then the lead market maker is entitled to guaranteedparticipation with the incoming sell order. The process proceeds to step1608, where it checks if the incoming sell order's size is greater thantwo contracts. If it is less than or equal to two contracts, then theprocess continues to step 1609, where it matches the incoming sell orderwith one contract of the lead market's bid, at the NBB price. It doesthis by generating an immediate or cancel (“IOC”) buy pseudo-order onbehalf of the underlying lead market maker bid, and executing theincoming sell order against the buy pseudo-order. After executing thebuy pseudo-order, the order matching engine notifies the market makerquote engine 32 b of the quantity of contracts that executed (onecontract) so that it can decrement the lead market maker's bid.

Then at step 1610, the process checks if the incoming sell order stillhas one contract available to trade. If it does not, then the processterminates in step 1612 as indicated. If it does, then the processcontinues to step 1611, where it matches the single remaining contractof the incoming sell order with one contract of the best displayed bid.The best displayed bid is the buy order or quote with the highestranking in the Display Order Process according to price/time priority.The process terminates in step 1612 as indicated.

Returning to step 1608, if, however, the incoming sell order has morethan two contracts available to execute, then the process, in thisembodiment, determines if there are any customer orders that areeligible to execute ahead of the lead market maker's bid. Accordingly,the process proceeds to step 1614, where it checks if there are anydisplayed customer buy orders at the NBB. It should be noted that acustomer discretionary buy order whose displayed price is at the NBBqualifies as an eligible displayed order. However, if the discretionaryprice is at or better than the NBB but the display price is inferior tothe NBB, then the customer discretionary buy order is not eligible toparticipate in the LMM Guarantee Process.

If there are no displayed customer buy orders at the NBB, then the leadmarket maker is entitled to participate immediately with the incomingsell order. The process proceeds to step 1632, where it retrieves astored, configurable guaranteed allocation parameter determined by themarket center's business rules (“LMMGuaranteedPercent”). At step 1634,the process computes the maximum quantity of contracts that the leadmarket maker is guaranteed for execution (“LMMGuaranteedAllocation”) bymultiplying the remaining (“Leaves”) quantity of the incoming sell orderby the LMMGuaranteedPercent parameter, and rounding the result down tothe nearest integer value if necessary. In step 1638, the processmatches the incoming sell order with the lead market maker's bid, at theNBB price, up to the lesser of the computed LMMGuaranteedAllocation sizeand the lead marker maker bid size. It does this by generating an IOCbuy pseudo-order on behalf of the underlying lead market maker bid, andexecuting the incoming sell order against the buy pseudo-order. Afterexecuting the buy pseudo-order, the order matching engine notifies themarket maker quote engine 32 b of the quantity of contracts thatexecuted so that it can decrement the lead market maker's bid.

In step 1642, the process checks if the incoming sell order still hasany contracts available to trade. If the incoming sell order has beencompletely executed, then the process terminates in step 1644 asindicated. However, if the incoming sell order still has contractsavailable to trade, then the process returns to the step where it wasoriginally initiated, so that the incoming sell order can continue toexecute against other bids if possible. The LMM Guaranteed Bid Processis completed, and any remaining quantity of the incoming sell order isreleased to the Display Order Process.

Returning to step 1614, if, however, there are displayed customer buyorders at the NBB, then the process continues to step 1616, where itretrieves the timestamp assigned to the lead market maker's bid (thetime assigned by the market maker quote engine 32 b) and stores it inthe parameter “LMMBidTimestamp.” In step 1618, the process retrieves theearliest displayed customer buy order at the NBB. In step 1620, theprocess compares the timestamp of the retrieved customer buy order withthe LMMBidTimestamp parameter, and if the customer buy order precededthe lead market maker's bid, then the process continues to step 1622,where it matches the incoming sell order with the retrieved customer buyorder at the NBB price.

In step 1624, the process checks if the incoming sell order still hascontracts available to trade. If it does not, then the processterminates in step 1626 as indicated. If it does, then the processcontinues to step 1628, where it checks if there are any additionaldisplayed customer buy orders priced at the NBB. If there are additionalcustomer orders, then in step 1630, the process retrieves the nextearliest displayed customer buy order at the NBB and returns to step1620, where it checks if the newly-retrieved customer buy order wasreceived prior to the lead market maker's bid. It repeats this processuntil all customer buy orders with price/time priority over the leadmarket maker's bid have been matched, unless the incoming sell order isexhausted first.

Returning to step 1620, if, however, the timestamp of the retrievedcustomer buy order is not lower than the LMMBidTimestamp, then thecustomer order was not received prior to the lead market maker's bid,and is therefore not eligible to execute in the LMM Guaranteed BidProcess. In this case, the process proceeds to step 1632, and executesthe lead market maker guaranteed allocation according to steps 1632through 1644 (or 1646) as described above.

Returning to step 1628, if, however, there are no additional displayedcustomer buy orders at the NBB, then the process also proceeds to step1632 at this point, and executes the lead market maker guaranteedallocation according to steps 1632 through 1644 (or 1646) as describedabove.

The DMM Guaranteed Bid Process

Where the process has determined that an incoming sell order was sent byan order sending firm 26 that is permissioned to send directed orders toa market maker firm 31, the DMM Guaranteed Bid Process is activated asindicated at step 1800 (FIG. 15). FIG. 15 illustrates a routine whereinthe order matching engine 21 executes the incoming directed sell orderin the Directed Order Process, but only if the designated market maker'sbid is at the NBB. The DMM Guaranteed Bid Process is very similar to thepreviously described LMM Guaranteed Bid Process, as the designatedmarket maker in this situation receives the same privileges as the leadmarket maker for the purpose of executing with the incoming directedorder.

At step 1802, the process retrieves the designated market maker's bid.In step 1804, the process checks if the designated market maker's bid isat the NBB price. If the designated market maker's bid is inferior tothe NBB, then the designated market maker is not entitled to guaranteedparticipation with the incoming directed sell order. However, the leadmarket maker may still be entitled to participate with the incomingorder instead. Accordingly, the process continues to step 1806, wherethe LMM Guaranteed Bid Process is activated, and the process proceeds tostep 1600 (FIG. 14).

Returning to step 1804, if, however, the designated market maker's bidis at the NBB, then the designated market maker is entitled toguaranteed participation with the incoming order. The process proceedsto step 1808, where, in this embodiment, it checks if the incomingdirected sell order's size is greater than two contracts. If it is lessthan or equal to two contracts, then the process continues to step 1809,where it matches the incoming sell order with one contract of thedesignated market maker's bid, at the NBB price. It does this bygenerating an IOC buy pseudo-order on behalf of the underlyingdesignated market maker bid, and executing the incoming sell orderagainst the buy pseudo-order. After executing the buy pseudo-order, theorder matching engine notifies the market maker quote engine 32 b of thequantity of contracts that executed (one contract) so that it candecrement the designated market maker's bid.

In step 1810, the process checks if the incoming sell order still hasone contract available to trade. If it does not, then the processterminates in step 1812 as indicated. If it does, then the processcontinues to step 1811, where it matches the single remaining contractof the incoming sell order with one contract of the best displayed bid.The best displayed bid is the buy order or quote with the highestranking in the Display Order Process according to price/time priority.The process terminates in step 1812 as indicated.

Returning to step 1808, if, however, the incoming directed sell orderhas more than two contracts available to execute, then the process mustdetermine if there are any customer orders that are eligible to executeahead of the designated market maker's bid. Accordingly, it proceeds tostep 1814, where it checks if there are any displayed customer buyorders at the NBB. It should be noted that a customer discretionary buyorder whose displayed price is at the NBB qualifies as an eligibledisplayed order. However, if the discretionary price is at or betterthan the NBB but the display price is inferior to the NBB, then thecustomer discretionary buy order is not eligible to participate in theDMM Guarantee Process.

If there are no displayed customer buy orders at the NBB, then thedesignated market maker is entitled to participate immediately with theincoming directed sell order. The process proceeds to step 1832, whereit retrieves a stored, configurable guaranteed allocation parameterdetermined by the market center's business rules(“DMMGuaranteedPercent”). In step 1834, the process computes the maximumquantity of contracts that the designated market maker is guaranteed forexecution (“DMMGuaranteedAllocation”) by multiplying the remaining(“Leaves”) quantity of the incoming directed sell order by theDMMGuaranteedPercent parameter, and rounding the result down to thenearest integer value if necessary. In step 1838, the process matchesthe incoming sell order with the designated market maker bid, at the NBBprice, up to the lesser of the computed DMMGuaranteedAllocation size andthe designated market maker bid size. It does this by generating an IOCbuy pseudo-order on behalf of the underlying designated market makerbid, and executing the incoming sell order against the buy pseudo-order.After executing the buy pseudo-order, the order matching engine notifiesthe market maker quote engine 32 b of the quantity of contracts thatexecuted so that it can decrement the designated market maker's bid.

In step 1842, the process checks if the incoming directed sell orderstill has any contracts available to trade. If the incoming directedsell order has been completely executed, then the process terminates instep 1844 as indicated. However, if the incoming directed sell orderstill has contracts available to trade, then the process continues tostep 1846, where it returns to the step where it was originallyinitiated, so that the incoming sell order (no longer directed) cancontinue to execute against other bids if possible. The DMM GuaranteedBid Process is completed, and any remaining quantity of the incomingsell order is released to the Display Order Process.

Returning to step 1814, if, however, there are displayed customer buyorders at the NBB, then the process continues to step 1816, where itretrieves the timestamp assigned to the designated market maker's bid(the time assigned by the market maker quote engine 32 b) and stores itin the parameter “DMMBidTimestamp.” In step 1818, the process retrievesthe earliest displayed customer buy order at the NBB. In step 1820, theprocess compares the timestamp of the retrieved customer buy order withthe DMMBidTimestamp parameter, and if the customer buy order precededthe designated market maker bid, then the process continues to step1822, where it matches the incoming directed sell order with theretrieved customer buy order at the NBB price.

In step 1824, the process checks if the incoming directed sell orderstill has contracts available to trade. If it does not, then the processterminates in step 1826 as indicated. If it does, then the processcontinues to step 1828, where it checks if there are any additionaldisplayed customer buy orders priced at the NBB. If there are additionalcustomer orders, then in step 1830, the process retrieves the nextearliest displayed customer buy order at the NBB and returns to step1820, where it checks if the newly-retrieved customer buy order wasreceived prior to the designated market maker's bid. It repeats thisprocess until all customer buy orders with price/time priority over thedesignated market maker's bid have been matched, unless the incomingdirected sell order is exhausted first.

Returning to step 1820, if, however, the timestamp of the retrievedcustomer buy order is not lower than the DMMBidTimestamp, then thecustomer order was not received prior to the designated market makersbid, and is therefore not eligible to execute in the Directed OrderProcess. In this case, the process proceeds to step 1832, and executesthe designated market maker guaranteed allocation according to steps1832 through 1844 (or 1846) as described above.

Returning to step 1828, if, however, there are no additional displayedcustomer buy orders at the NBB, then the process also proceeds to step1832, and executes the designated market maker guaranteed allocationaccording to steps 1832 through 1844 (or 1846) as described above.

Discretionary Buy Orders Step Up to NBB Process

Referring now to FIG. 16, the Discretionary Buy Orders Step Up to NBBProcess is illustrated. The Discretionary Buy Orders Step Up to NBBProcess allows resting discretionary buy orders to step up to the NBBprice to execute against an incoming sell order that would otherwise beposted, routed, canceled, hidden, or repriced to not lock/cross the NBB.The routine is initiated at step 1900 after it has already beendetermined that one or more eligible discretionary buy orders are on theorder book 29 a.

In step 1902, the process retrieves the discretionary buy order with thehighest ranking at the NBB price. In step 1904, it checks if theincoming sell order's Leaves quantity is greater than or equal to theretrieved discretionary buy order's minimum discretion size. If the buyorder does not include a minimum discretion size, then its valuedefaults to zero, and the incoming sell order's size is automaticallygreater. If, however, the discretionary buy order does include a minimumdiscretion size and the sell order's size is not at least its equal,then the retrieved discretionary buy order cannot use its discretion tomatch the incoming sell order, and the process continues to step 1916,where it checks if there are any other resting discretionary buy ordersthat might be eligible instead. If there are no other additionaldiscretionary buy orders that can step up to the NBB, then the processcontinues to step 1918, where it returns to the step where it wasoriginally initiated.

Returning to step 1904, if, however, the incoming sell order does havequantity at least equal to the discretionary buy order's minimumdiscretion size, then the process continues to step 1910, where itmatches the incoming sell order with the retrieved discretionary buyorder, at the price of the NBB. In step 1912, the process checks if theincoming sell order still has any quantity remaining. If it does not,then the process continues to step 1914, where it terminates asindicated. If it does still have available quantity, then the processcontinues to step 1916 where it checks if there are any additionaldiscretionary buy orders that can step up to the NBB to trade.

If there are no additional orders, then the process continues to step1918, where it returns to the step where the procedure was originallyinitiated. If, however, there are additional eligible discretionary buyorders, then the process continues to step 1920, where it retrieves thenext discretionary buy order with the highest ranking at the NBB price.The process returns to step 1904, where it repeats the process ofchecking if the retrieved discretionary buy order can execute with theincoming sell order, or whether the process must retrieve the next-bestdiscretionary buy order instead. It repeats the steps described aboveuntil the incoming sell order is completely matched, or until there areno more resting discretionary buy orders that can trade with theincoming sell order.

Incoming Sell Order Received

Referring now to FIGS. 17A-17B, the process is illustrated where theorder matching engine 21 receives an incoming sell order withoutdiscretion. As in the previous FIGS. 12A-12B which illustrate a routinefor receiving an incoming discretionary sell order, the routineillustrates the execution and/or routing of a marketable incoming sellorder. The incoming sell order attempts to execute against as manydisplayed orders and market maker quotes as appropriate, but at thepoint where the incoming sell order is about to be posted, routed, orcanceled, then the process looks for resting discretionary buy ordersthat can step up to execute. Additionally, if the incoming sell order isan order type that can contemporaneously execute beyond the NBB aftersatisfying all the away markets quoting at the NBB, e.g., using the“trade and ship” exception, then the process looks for resting buyorders at one tick inferior to the NBB, including resting discretionarybuy orders that can step up to one tick inferior to the NBB.

At step 2000, the incoming sell order is received. In step 2001, theprocess retrieves the NBBO, and in step 2002, it checks if the incomingsell order is greater than the NBO. If the price is higher than the NBO,then the order is not executable, and accordingly the process continuesto step 2004, where it posts or cancels the incoming sell orderaccording to the rules of the order type, and the process terminates instep 2005. If, however, the incoming sell order is not greater than theNBO, then the process continues to step 2006 to determine if it is lessthan the NBB. If the price is lower than the NBB, then the processcontinues to step 2008, where it initiates the Too-Executable Sell OrderCheck Process, and proceeds to step 1500 in FIG. 13. If the incomingsell order is not canceled in the Too-Executable Sell Order CheckProcess, i.e., it is not determined to be too executable, then theprocess continues to step 2011, where it creates a virtual consolidatedorder and quote list for the option series by combining the away marketBBO book 25 a, the market maker quote book 33 a, and the internal orderbook 29 a, and ranking the orders and quotes according toprice/display/time priority, but with a preference for displayed tradinginterest over away market quotes at the same price. The process thencontinues to step 2030.

Returning to step 2006, if the incoming sell order is not less than theNBB, then the process continues to step 2010, where it checks if it isgreater than the NBB. If it is neither less than nor greater than theNBB, then it is equal to the NBB, and the process continues to step2011, where it creates a virtual consolidated order and quote list forthe option series. The process then continues to step 2030 as theincoming sell order is marketable at the NBB.

Returning to step 2010, if, however, the incoming sell order is greaterthan the NBB, then it is priced between the spread and is not executableunless there are resting discretionary buy orders that can step up tomatch it. Accordingly, the process continues to step 2012, where itchecks if any resting discretionary buy orders have a discretionaryprice that is greater than or equal to the incoming sell order's price.If there are no such eligible discretionary buy orders, then the processcontinues to step 2026, where it posts or cancels the incoming sellorder according to the rules of the order type, and the processterminates in step 2028 as indicated.

Returning to step 2012, if there are resting discretionary buy ordersthat can step up to the sell order's price, then the process continuesto step 2014, where it retrieves the discretionary buy order with thehighest ranking at the incoming sell order's price. For example, if thesell order's price is 1.95, then all discretionary buy orders that canstep up to 1.95 are evaluated, and the order with the highest ranking atthe price of 1.95 is retrieved. The process continues to step 2016,where it checks if the incoming sell order's size is greater than orequal to the resting discretionary buy order's minimum discretion size.It should be noted that in this embodiment of the invention, only theminimum discretion size of a resting discretionary order is checked, todisguise its presence in the order book. The minimum discretion size ofan incoming discretionary order is not checked, as the process attemptsto execute as much quantity as possible. If the buy order does notinclude a minimum discretion size, then its value defaults to zero andthe incoming sell order's size is automatically greater. If the buyorder does include a minimum discretion size, then the incoming sellorder's size must be at least its equal. If the resting discretionarybuy order's minimum discretion size is higher, then the incoming sellorder does not have sufficient size, and the process continues to step2024, where it checks if there are additional resting discretionary buyorders that can step up to the incoming sell order's price. If thereare, the process returns to step 2014, where it retrieves the nexthighest-ranked discretionary buy order, and repeats the process ofchecking its minimum discretion size against the incoming sell ordersize.

Returning to step 2016, it however, the incoming sell order hassufficient size to execute against the retrieved discretionary buyorder, then the process continues to step 2018, where it matches theincoming sell order and the resting discretionary buy order, at theprice of the incoming sell order. Accordingly, the discretionary buyorder steps up only as high as is necessary to execute. The processcontinues to step 2020, where it checks if the incoming sell order stillhas quantity remaining. If it does not, then the process terminates instep 2022 as indicated. If, however, the incoming sell order still hasavailable quantity, then the process continues to step 2024, where itchecks if there are additional resting discretionary buy orders that canstep up to execute against it. The process continues until the incomingsell order is depleted, or until there are no more discretionary buyorders that can execute against it, in which case it is posted orcanceled according to its order type, as described above.

If in the process of executing the procedures described above, theprocess determines that the incoming sell order is executable againstthe NBB, then at step 2030, it checks if the issue has any assignedmarket makers. If it does, then the process continues to step 2032,where it checks whether the incoming sell order is a directed order. Ifit is a directed order, then the process continues to step 2034, whereit initiates the Directed Order Process and proceeds to step 700 in FIG.7A. Returning to step 2032, if, however, the incoming sell order is nota directed order, then the process continues to step 2036, where itinitiates the LMM Guaranteed Bid Process and proceeds to step 1600 inFIG. 14.

Regardless of whether the incoming sell order participates in theDirected Order Process or the LMM Guaranteed Bid Process or in neitherprocess (if the applicable market maker was not quoting at the NBB), theprocess continues to step 2038, where it checks if the incoming sellorder is still less than or equal to the NBB. By way of explanation, itmay have exhausted the NBB if it executed in a market maker guaranteedentitlement process. If the incoming sell order is not executable at thepresent NBB, then the process returns to step 2012, where it checks ifthere are any resting discretionary buy orders that can step up to theincoming sell order's price. By way of explanation, the process is nowlooking for resting discretionary buy orders at this point because ifdisplayed buy orders or market maker bids can execute against theincoming sell order, then those orders/quotes have priority over anyresting discretionary buy orders that must use discretion to execute.The discretionary buy orders are allowed to step up now only because alltrading interest at the previous NBB has been depleted by trading andthe incoming sell order would otherwise be posted or canceled at thispoint, as it is currently priced between the spread. The processcontinues to steps 2012 through 2028, as previously described in detail,until the incoming sell order is either completely matched or else isposted or canceled.

Returning to step 2038, if, however, the incoming sell order is stillless than or equal to the NBB, then the process continues to step 2042,where it checks if the market center 20 is at the NBB or not. If it isat the NBB, then the process continues to step 2044, where it retrievesthe displayed buy order or market maker bid with the highest ranking inthe Display Order Process. If it is a market maker bid, then in step2045, the process generates an IOC buy pseudo-order on behalf of theunderlying market maker bid. In step 2046, it matches the incoming sellorder and the buy order or pseudo-order, at the NBB price. If the buyorder is a pseudo-order, then the process also notifies the market makerquote engine 32 b of the quantity of contracts that were executed sothat it can decrement the market maker's bid as appropriate.

In step 2048, the process checks if the incoming sell order still hasany quantity remaining, and if it does not, the process continues tostep 2066, where it terminates as indicated. If, however, the incomingsell order still has quantity available, then the process returns tostep 2038, where it repeats the procedure described above fordetermining if the incoming sell order can execute against additionalposted buy orders or market maker bids.

Returning to step 2042, if, however, the market center 20 is not at theNBB, then the incoming sell order may be required to route to one ormore away markets at the NBB. However, before any such routing decisionoccurs, the process first checks at step 2050 if there are any restingdiscretionary buy orders that can step up to the NBB to execute with theincoming sell order. If there are such eligible orders, then the processcontinues to step 2052, where it initiates the Discretionary Buy OrdersStep Up to NBB Process and proceeds to step 1900 in FIG. 16. If theincoming sell order still has quantity available after executing withthe resting discretionary buy orders in FIG. 16, then the processcontinues to step 2054. The process also continues to step 2054 if atstep 2050 the process determines that there are no resting discretionarybuy orders that can step up to the NBB.

In step 2054, the process checks if the incoming sell order should berouted off the market center 20. It is possible that the incoming sellorder is an order type that cannot be routed (e.g., anExchange-Restricted Order, or an IOC order). It is also possible thatthe incoming sell order type can be routed, but all the away marketcenters quoting at the NBB have already been fully satisfied by priororders routed over the linkage. If the incoming sell order should notroute, then the process continues to step 2064, where it posts, queues,cancels, hides, or reprices the incoming sell order according to therules for the order type, and the process terminates in step 2066 asindicated.

Returning to step 2054, if, however, the process determines that theincoming sell order should be routed, then the process continues to step2056, where it releases the incoming sell order to the routing process,which routes the incoming sell order to each eligible away market centerquoting at the NBB, at a quantity up to its unsatisfied bid size, and ata price equal to the NBB. After routing to all eligible market centers,the process continues to step 2058, where it checks if the incoming sellorder still has quantity remaining. If it does not, the processcontinues to step 2066, where it terminates as indicated. If, however,the incoming sell order does still have quantity available, then theprocess continues to step 2060, where it checks if the incoming sellorder type is allowed to execute beyond the NBB after it has satisfiedthe NBB. For example, sweep limit orders are allowed to execute beyondthe NBB. If the incoming sell order type is not allowed to executebeyond the NBB, then the process continues to step 2064 where theremainder of the incoming sell order is posted, queued, canceled, orrepriced according to the rules of the order type, and the processterminates in step 2066. If, however, the incoming sell order type isallowed to execute beyond the NBB, then the process continues to step2062, where it initiates the Posted Buy Order Trade-and-Ship Price CheckProcess” and proceeds to step 2100 in FIG. 18. After attempting toexecute in FIG. 18, if the incoming sell order is not fully matched,then the remaining quantity is posted, queued, canceled, hidden, orrepriced in step 2064 according to the rules of the order type, and theprocess terminates in step 2066.

Posted Buy Order Trade-and-Ship Price Check Process

Referring now to FIG. 18, the Posted Buy Order Trade-and-Ship PriceCheck Process is illustrated. The Posted Buy Order Trade-and-Ship PriceCheck Process is a process that executes when an incoming sell order hasbeen determined to be eligible to execute against resting buy orderspriced at one tick inferior to the NBB contemporaneously with satisfyingall away markets bidding at the NBB, for example, in accordance with the“trade and ship” marketplace exception. In this embodiment, restingdiscretionary buy orders that can step up to one tick inferior to theNBB are also allowed to execute against the incoming sell order.

The process is initiated at step 2100, and at step 2102, the processcomputes the price that is one tick inferior to the NBB (the“TradeAndShipPrice”) by subtracting one minimum price increment (tick)from the current NBB price. In step 2104, it retrieves the displayed buyorder with the highest ranking in the Display Order Process. In step2106, it checks if the retrieved buy order's price is equal to thecomputed TradeAndShipPrice, i.e., if the retrieved buy order is one tickworse than the NBB. If it is, the process continues to step 2108, whereit matches the incoming sell order and the retrieved buy order at thecomputed TradeAndShipPrice.

In step 2110, the process checks if the incoming sell order has anyquantity remaining. If it does not, then the process terminates in step2112 as indicated. If it does still have available quantity, then theprocess continues to step 2114 where it retrieves the next-bestdisplayed buy order and returns to step 2106, where it repeats theprocess of checking if the retrieved buy order's price is equal to thecomputed TradeAndShipPrice. If it is, the process matches the orders atthe TradeAndShipPrice, and continues according to the steps describedabove until the incoming sell order is completely matched or until thereare no additional displayed buy orders at the TradeAndShipPrice, asdescribed next.

Returning to step 2106, if, however, the retrieved displayed buy orderhas a price that is inferior to the computed TradeAndShipPrice, then theprocess continues to step 2116, where it checks if there are any restingdiscretionary buy orders that can step up to the computedTradeAndShipPrice. If there are no such eligible orders, then theprocess continues to step 2117, where it returns to the step where itwas originally initiated, back to step 2062 (FIG. 17B). If, however,there are resting discretionary buy orders that can step up to theTradeAndShipPrice, then the process continues to step 2118, where itretrieves the discretionary buy order with the highest ranking at theTradeAndShipPrice. For example, if the NBB is 2.00 and this issue has atick of 0.05 at this price level, then the TradeAndShipPrice is 1.95,and the discretionary buy order with the highest ranking at the price of1.95 is retrieved.

The process continues to step 2120, where it checks if the incoming sellorder's leaves quantity is greater than or equal to the retrieveddiscretionary buy order's minimum discretion size. If the retrieved buyorder does not have a minimum discretion size, then its value defaultsto zero, and the incoming sell order's size is automatically greater.If, however, the retrieved buy order does include a minimum discretionsize and the incoming sell order's size is not at least equal to it,then the process continues to step 2128, where it checks if there areany other resting discretionary buy orders that can step up to tradewith the incoming sell order instead.

If there are none, then the process continues to step 2130, where itreturns to the step where it was originally initiated, back to step 2062(FIG. 17B). If, however, there are additional discretionary buy ordersthat can step up to the computed TradeAndShipPrice, then the processcontinues to step 2132, where it retrieves the next-best discretionarybuy order and then returns to step 2120 to repeat the process describedabove for determining if the orders are eligible to match. It continuesthis process until the incoming sell order is completely matched oruntil there are no more discretionary buy orders that are eligible totrade.

Returning to step 2120, if the incoming sell order has sufficient sizeto at least equal the discretionary buy order's minimum discretion size,then the process continues to step 2122, where it matches the incomingsell order with the retrieved discretionary buy order, at the computedTradeAndShipPrice. In step 2124, the process checks if the incoming sellorder still has any remaining quantity, and if it does not, itterminates in step 2126 as indicated. If the incoming sell order stillhas available quantity, then the process continues to step 2128, whereit checks if there are additional resting discretionary buy orders thatcan step up to execute. It continues according to the steps describedabove until the incoming sell order is completely matched or until thereare no more discretionary buy orders that are eligible to trade.

It should be noted that if market maker bids priced at one tick inferiorto the NBB are also allowed to execute with the incoming sell orderaccording to marketplace rules, then at step 2104 and step 2114, theprocess will retrieve the best displayed buy order or market maker bid,as determined by their ranking in the Display Order Process. In the caseof a market maker bid, the process generates an IOC buy pseudo-order onbehalf of the market maker bid, executes the incoming sell order againstthe buy pseudo-order at the TradeAndShipPrice, and then notifies themarket maker quote engine 32 b of the executed quantity so that it candecrement the market maker bid as appropriate.

Example of the Ranking of a Discretionary Order in the Display OrderProcess and the Working Order Process

A discretionary order resides in the Display Order Process, but also hasa price component that resides in the Working Order Process. This isillustrated in the figure below by explicitly showing a link at eachprice level at which a discretionary order can execute. As the pricesare not publicly displayed, the links are shown “dark” in this example.Although Discretionary Orders A and C may appear to reside in multiplecells, a discretionary order only has one position in the internal orderbook 29 a, and that position is based on its display price. If multiplediscretionary orders are eligible to “step up” to execute against anincoming order, then the order with the highest ranking in the DisplayOrder Process is also granted the highest ranking in the Working OrderProcess.

For example, the order matching engine 21 receives the following threeorders, in this sequence:

Order A: Buy 30@2.25, Discretionary Price=2.30

Order B: Buy 10@2.25

Order C: Buy 20@2.20, Discretionary Price=2.35

The orders conceptually look like this in the bid side of the internalorder book 29 a:

In this example, assume that the NBB is 2.25 and the best away marketcenter's bid is also 2.25 so that there are no trade-through issues.

As illustrated by the way the order matching engine 21 has ranked theorders in the internal order book 29 a, the posted buy orders can tradewith a marketable incoming sell order as follows:

-   -   If the incoming sell order's price is 2.35, only Order C can        trade.    -   If the incoming sell order's price is 2.30, both Order A and        Order C can trade. As Order A has a higher priority in the        Display Order Process (its display price of 2.25 is superior to        Order C's display price of 2.20), it also has higher priority in        the Working Order Process at the price level of 2.30, regardless        of the fact that its discretionary price (2.30) is inferior to        the discretionary price (2.35) of Order C.    -   If the incoming sell order's price is 2.25, then Orders A, B,        and C can trade. Orders A and B can only trade in the Display        Order Process, with Order A having time priority over Order B.        Order C can only trade in the Working Order Process after Orders        A and B have been completely executed first.

As illustrated above, an order can trade with discretion only after alldisplayed trading interest is exhausted first. As also illustratedabove, when multiple discretionary orders can “step up” to the samediscretionary price, the order with the higher priority in the DisplayOrder Process is also granted the higher priority in the Working OrderProcess. These rules serve to reward orders for displaying moreaggressive prices in the public order book.

Detailed Examples of Discretionary Order Trading

Examples of how quotes and orders are processed in a preferredembodiment of the invention are provided below. It should be understoodthat the order and quote prices and sizes discussed in these examplesare by way of example only to illustrate how the process of anembodiment of the invention operates. Quote and order processing is notlimited to these examples. It should also be noted that the term“linkage” when referring to the routing of orders between market centersis not limited to an intermarket linkage such as the Options LinkageAuthority, but may also include any other direct or third-party networkconnection or any broker/dealer affiliate acting as an agent for routingorders.

Example 1 Incoming Directed Market Order Executes Against RestingDiscretionary Orders in the Directed Order Process and the Working OrderProcess

In the Directed Order Process, a customer order can step ahead of othernon-customer orders and quotes that were received before it, as can thedesignated market maker quote. Therefore, in the Directed Order Process,price priority is strictly enforced, but time priority is not.

The following example illustrates the ranking of orders and quoteswithin the DMM Guarantee Process, the Display Order Process, and theWorking Order Process. In this example, the issue has a lead marketmaker (Firm B) and a regular market maker (Firm A). After executing inthe Directed Order Process first, the incoming order then proceeds toexecute in the Display Order Process next, and then executes in theWorking Order Process last. For ease of illustration, only the offerside of the books is shown in this example.

→The NBBO is 1.95 to 2.05

The offer side of the away market BBO quote book 25 a looks like this:

Offer Details Source Time received AwayMktA Offer 60 @ 2.05 Away MarketA 10:02:32 AwayMktB Offer 30 @ 2.05 Away Market B 10:03:15

The offer side of the market maker quote book 33 a looks like this:

Offer Details Source Time received Quote A Offer 60 @ 2.05 FirmA10:04:22 Quote B Offer 30 @ 2.05 FirmB 10:05:30

The offer side of the internal order book 29 a looks like this:

Order Details On behalf of Time received Order D Sell 30 @ 2.05Non-customer 10:01:03 Order E Sell 10 @ 2.05, Customer 10:03:50Discretion to 2.00 Order G Sell 40 @ 2.10, Customer 09:58:57 Discretionto 2.00

The offer side of the public order book looks like this:

Published Offers 130 @ 2.05  40 @ 2.10

Step 1 a: Determine if a Designated Market Maker is Entitled to aGuaranteed Allocation of an Incoming Directed Order

In step 1000 (FIG. 10A), the process receives the following incomingDirected Order in issue XYZ from order sending firm “FirmB” designatedfor market maker firm “FirmA”:

Order 1: Buy 150@Market, Directed Order for FirmA

In step 1001, the process retrieves the NBBO (1.95 to 2.05). In step1002, it checks if the incoming Directed Buy Order 1 is less than theNBB (1.95). As market buy orders are priced at the NBO by definition,the process continues to step 1006, where it checks if incoming DirectedBuy Order 1 is greater than the NBO. Again, as market buy orders arepriced at the NBO by definition, the process continues to step 1010,where it checks if incoming Directed Buy Order 1 is less than the NBO.As it is priced at the NBO by definition, the process continues to step1011, where it generates a virtual consolidated order and quote list forthe option series.

The offer side of the virtual consolidated order and quote list lookslike this:

Order or Quote Details Source Time received Order D Sell 30 @ 2.05Non-customer 10:01:03 Order E Sell 10 @ 2.05, Customer 10:03:50Discretion to 2.00 Quote A Offer 60 @ 2.05 FirmA 10:04:22 Quote B Offer30 @ 2.05 FirmB 10:05:30 AwayMktA Offer 60 @ 2.05 Away Market A 10:02:32AwayMktB Offer 30 @ 2.05 Away Market B 10:03:15 Order G Sell 40 @ 2.10,Customer 09:58:57 Discretion to 2.00

The process continues to step 1030, where it checks if this issue hasany assigned market makers. As it does, the process continues to step1032, where it checks if incoming Buy Order 1 is a directed order ornot. As it is a directed order, the process continues to step 1034,where it initiates the Directed Order Process and proceeds to step 700(FIG. 7A).

In step 702, the process sets the order sending firm (“OSF”) parameterto “FirmB,” the ID assigned to the firm that sent incoming Directed BuyOrder 1. In step 704, it retrieves the DMM/OSF Permissions Table, whichlooks like this:

Designated Market Default Market Order Sending Issue Maker Firm (DMM)Maker? Firm (OSF) XYZ FirmA FirmB XYZ FirmA Yes FirmC XYZ FirmB YesFirmB XYZ FirmB FirmA

In step 706, the process checks if incoming Directed Buy Order 1specifies a designated market maker. As it has specified Firm A as thedesignated market maker, the process continues to step 708, where itsets the designated market maker (“DMM”) parameter to “FirmA,” the IDassigned to the designated firm. In step 710, the process checks therules in the DMM/OSF Permissions Table, and determines that Firm B isindeed permissioned to direct orders to Firm A (first rule in theTable).

The process proceeds to step 718, where it checks if incoming DirectedBuy Order 1 is a buy order or a sell order. As it is a buy order, theprocess continues to step 720, where it initiates the DMM GuaranteedOffer Process and proceeds to step 800 FIG. 8).

Step 1 b: Execute the Incoming Directed Order Against a Customer Orderand the DMM Quote

In step 802, the process retrieves the offer for the designated marketmaker, Firm A. As shown below, the designated market maker offer isQuote A:

Order or Quote Details Source Time received Order D Sell 30 @ 2.05Non-customer 10:01:03 Order E Sell 10 @ 2.05, Customer 10:03:50Discretion to 2.00 Quote A Offer 60 @ 2.05 ← FirmA 10:04:22 Quote BOffer 30 @ 2.05 FirmB 10:05:30 AwayMktA Offer 60 @ 2.05 Away Market A10:02:32 AwayMktB Offer 30 @ 2.05 Away Market B 10:03:15 Order G Sell 40@ 2.10, Customer 09:58:57 Discretion to 2.00

In step 804, the process determines that Quote A (2.05) is equal to theNBO (2.05), and accordingly Quote A is eligible to participate in theDirected Order Process. The process continues to step 808, where itchecks if incoming Directed Buy Order 1's size (150 contracts) isgreater than two contracts. As it is, in step 814, the process checks ifthere are any displayed customer sell orders at the NBO (2.05). As shownbelow, Discretionary Order E is a customer sell order at the NBO becauseits display price is 2.05:

Order or Quote Details Source Time received Order D Sell 30 @ 2.05Non-customer 10:01:03 Order E Sell 10 @ 2.05, ← Customer 10:03:50Discretion to 2.00 Quote A Offer 60 @ 2.05 FirmA 10:04:22 Quote B Offer30 @ 2.05 FirmB 10:05:30 AwayMktA Offer 60 @ 2.05 Away Market A 10:02:32AwayMktB Offer 30 @ 2.05 Away Market B 10:03:15 Order G Sell 40 @ 2.10,Customer 09:58:57 Discretion to 2.00

The process continues to step 816, where it stores the timestampassigned to Quote A (10:04:22) in the parameter DMMOfferTimestamp. Instep 818, it retrieves the earliest displayed customer sell order at theNBO, Discretionary Sell Order E. In step 820, the process compares thetimestamp of Discretionary Sell Order E (10:03:50) to the value of theDMMOfferTimestamp parameter (10:04:22) and determines that the ordertimestamp is lower, i.e., the order was received prior to the quote.Accordingly, the process continues to step 822, where it matches 10contracts of incoming Directed Buy Order 1 with customer DiscretionarySell Order E at its displayed price of 2.05, completely depletingDiscretionary Sell Order E.

The offer side of the virtual consolidated order and quote list nowlooks like this:

Order or Quote Details Source Time received Order D Sell 30 @ 2.05Non-customer 10:01:03 Quote A Offer 60 @ 2.05 FirmA 10:04:22 Quote BOffer 30 @ 2.05 FirmB 10:05:30 AwayMktA Offer 60 @ 2.05 Away Market A10:02:32 AwayMktB Offer 30 @ 2.05 Away Market B 10:03:15 Order G Sell 40@ 2.10, Customer 09:58:57 Discretion to 2.00

The offer side of the internal order book 29 a now looks like this:

Order Details On behalf of Time received Order D Sell 30 @ 2.05Non-customer 10:01:03 Order G Sell 40 @ 2.10, Customer 09:58:57Discretion to 2.00

The offer side of the public order book now looks like this:

Published Offers 120 @ 2.05 ←  40 @ 2.10

The process continues to step 824, where it checks if incoming DirectedBuy Order 1 still has any quantity available to trade. As it has 140contracts remaining, the process continues to step 828, where it checksif there are any more displayed customer sell orders at the NBO. Itshould be noted that Discretionary Sell Order G is a customer order, butits display price (2.10) is inferior to the NBO (2.05), even though itsdiscretionary price (2.00) is superior to the NBO. Accordingly, it isnot eligible to participate in the Directed Order Process. The processproceeds to step 832, where it retrieves the guaranteed percentageallocated for designated market makers, which is stored in the parameter“DMMGuaranteedPercent.”

In this example, the DMMGuaranteedPercent is configured to 40%. In step834, the process multiplies the remaining quantity of incoming DirectedBuy Order 1 (140 contracts) by the DMMGuaranteedPercent (40%) to derivethe DMMGuaranteedAllocation of 56 contracts (40% of 140 contracts=56contracts). In step 838, the process matches 56 contracts of incomingDirected Buy Order 1 against Quote A, the lesser of theDMMGuaranteedAllocation (56 contracts) and the DMM Offer size (60contracts), at the price of 2.05. It does this by generating an IOCpseudo-order to Sell 60@2.05 on behalf of DMM Offer Quote A, andexecuting the incoming Directed Buy Order 1 against the sellpseudo-order. The process also notifies the market maker quote engine 32b to decrement Quote A by the 56 contracts just executed. Quote A stillhas 4 contracts available to trade. The Directed Order Process iscompleted.

The offer side of the virtual consolidated order and quote list nowlooks like this:

Order or Quote Details Source Time received Order D Sell 30 @ 2.05Non-customer 10:01:03 Quote A Offer 4 @ 2.05 ← FirmA 10:04:22 Quote BOffer 30 @ 2.05 FirmB 10:05:30 AwayMktA Offer 60 @ 2.05 Away Market A10:02:32 AwayMktB Offer 30 @ 2.05 Away Market B 10:03:15 Order G Sell 40@ 2.10, Customer 09:58:57 Discretion to 2.00

The market maker quote engine 32 b decrements Quote A. The offer side ofthe market maker quote book 33 a now looks like this:

Offer Details Source Time received Quote A Offer 4 @ 2.05 ← FirmA10:04:22 Quote B Offer 30 @ 2.05 FirmB 10:05:30

The offer side of the public order book now looks like this:

Published Offers 64 @ 2.05 ← 40 @ 2.10

The process continues to step 842, where it checks if incoming DirectedBuy Order 1 still has any quantity available to trade. As it still has84 contracts remaining, the process continues to step 846, where itreturns to the step where it was originally initiated, back to step 720(FIG. 7A).

From step 720, the process continues to step 722, where it returns tothe step where it was originally initiated, back to step 1034 (FIG.10B).

Step 1 c: Execute the Incoming Order in the Display Order Process

After the Directed Order Process completes, incoming Buy Order 1 is nolonger a directed order, and is processed like any other non-directedorder. In step 1038, the process checks if incoming Buy Order 1 is stillgreater than or equal to the NBO. As a market buy order is priced at theNBO by definition, the process continues to step 1042, where it checksif the market center 20 is at the NBO. As it is, the process continuesto step 1044, where it retrieves the sell order or market maker offerwith the highest ranking in the Display Order Process. As illustrated inthe table above, Sell Order D is the highest-ranked offer. The processcontinues to step 1046, where it matches 30 contracts of incoming BuyOrder 1 against Sell Order D, at the price of 2.05, completely depletingSell Order D.

The offer side of the virtual consolidated order and quote list nowlooks like this:

Order or Quote Details Source Time received Quote A Offer 4 @ 2.05 FirmA10:04:22 Quote B Offer 30 @ 2.05 FirmB 10:05:30 AwayMktA Offer 60 @ 2.05Away Market A 10:02:32 AwayMktB Offer 30 @ 2.05 Away Market B 10:03:15Order G Sell 40 @ 2.10, Customer 09:58:57 Discretion to 2.00

The offer side of the internal order book 29 a now looks like this:

Order Details On behalf of Time received Order G Sell 40 @ 2.10,Customer 09:58:57 Discretion to 2.00

The offer side of the public order book now looks like this:

Published Offers 34 @ 2.05 ← 40 @ 2.10

The process continues to step 1048, where it checks if incoming BuyOrder 1 still has any contracts available to trade. As it still has 54contracts remaining, the process returns to step 1038, where it checksif incoming Buy Order 1 is still greater than or equal to the NBO. As itis, the process continues to step 1042, where it checks if the marketcenter 20 is still at the NBO. As it is, the process continues to step1044, where it retrieves the sell order or market maker offer with thehighest ranking in the Display Order Process.

As illustrated in the table above, Quote A now has the highest rankingin the Display Order Process. As the process has already generated asell pseudo-order on behalf of Quote A in the Directed Order Process,the process continues to step 1046, where it matches 4 contracts ofincoming Buy Order 1 against the 4 remaining contracts of the sellpseudo-order, at the price of 2.05. Quote A is completely depleted andis removed from the virtual consolidated order and quote list. Theprocess also notifies the market maker quote engine 32 b to decrementQuote A by the 4 contracts executed.

The offer side of the virtual consolidated order and quote list nowlooks like this:

Order or Quote Details Source Time received Quote B Offer 30 @ 2.05FirmB 10:05:30 AwayMktA Offer 60 @ 2.05 Away Market A 10:02:32 AwayMktBOffer 30 @ 2.05 Away Market B 10:03:15 Order G Sell 40 @ 2.10, Customer09:58:57 Discretion to 2.00

The market maker quote engine 32 b removes depleted Quote A. The offerside of the market maker quote book 33 a now looks like this (Firm Amust manually replenish its offer):

Offer Details Source Time received Quote B Offer 30 @ 2.05 FirmB10:05:30

The offer side of the public order book now looks like this:

Published Offers 30 @ 2.05 ← 40 @ 2.10

The process continues to step 1048, where it checks if incoming BuyOrder 1 still has any contracts available to trade. As it still has 50contracts remaining, the process returns to step 1038, where it checksif incoming Buy Order 1 is still greater than or equal to the NBO. As itis, the process continues to step 1042, where it checks if the marketcenter 20 is still at the NBO. As it is, the continues to step 1044,where it retrieves the sell order or market maker offer with the highestranking in the Display Order Process.

As illustrated in the table above, Quote B now has the highest rankingin the Display Order Process. The process continues to step 1045, whereit generates an IOC pseudo-order to Sell 30@2.05 on behalf of Quote B.The process continues to step 1046, where it matches 30 contracts ofincoming Buy Order 1 against the sell pseudo-order, at the price of2.05. Quote B is completely depleted, and is removed from the virtualconsolidated order and quote list. The process also notifies the marketmaker quote engine 32 b to decrement Quote B by the 30 contractsexecuted.

The offer side of the virtual consolidated order and quote list nowlooks like this:

Order or Quote Details Source Time received AwayMktA Offer 60 @ 2.05Away Market A 10:02:32 AwayMktB Offer 30 @ 2.05 Away Market B 10:03:15Order G Sell 40 @ 2.10, Customer 09:58:57 Discretion to 2.00

The offer side of the market maker quote book 33 a is completelydepleted until Firm A and Firm B manually replenish their offers.

The offer side of the public order book now looks like this:

Published Offers 40 @ 2.10 ←

Step 1 d: Incoming Market Order is Ready to Route to an Away Market

The process continues to step 1048, where it checks if incoming BuyOrder 1 still has any contracts available to trade. As it still has 20contracts remaining, the process returns to step 1038, where it checksif incoming Buy Order 1 is still greater than or equal to the NBO. As itis, the process continues to step 1042, where it checks if the marketcenter 20 is at the NBO.

As shown in the Table above, Away Market A is now alone at the NBO. As amarket order, incoming Buy Order 1 is eligible to route. The processcontinues to step 1050, where it checks if there are any restingdiscretionary sell orders that can step up to the NBO price of 2.05. AsDiscretionary Sell Order G can step up as high as 2.00, the processcontinues to step 1052, where it initiates the Discretionary Sell OrdersStep Up to NBO Process and proceeds to step 900 (FIG. 9).

Step 1 e: Posted Discretionary Order Steps Up to the NBO to Match theIncoming Market Order

In step 902, the process retrieves resting Discretionary Sell Order G.In step 904, it checks if incoming Buy Order 1's Leaves quantity (20contracts) is greater than or equal to resting Discretionary Sell OrderG's minimum discretion size. As Sell Order G does not have a minimumdiscretion size and it therefore defaults to zero, incoming Buy Order1's size is greater.

In step 910, the process matches the remaining 20 contracts of incomingBuy Order 1 against resting Discretionary Sell Order G, at the NBO priceof 2.05. In step 912, the process checks if incoming Buy Order 1 has anycontracts remaining. As it does not, the process terminates in step 914as indicated. Discretionary Sell Order G still has 20 contractsremaining.

The offer side of the virtual consolidated order and quote list nowlooks like this:

Order or Quote Details Source Time received AwayMktA Offer 60 @ 2.05Away Market A 10:02:32 AwayMktB Offer 30 @ 2.05 Away Market B 10:03:15Order G Sell 20 @ 2.10, ← Customer 09:58:57 Discretion to 2.00

The offer side of the internal order book 29 a now looks like this:

Order Details On behalf of Time received Order G Sell 20 @ 2.10, ←Customer 09:58:57 Discretion to 2.00

The offer side of the public order book now looks like this:

Published Offers 20 @ 2.10 ←

As the incoming order has completed processing, the virtual consolidatedorder and quote list is deleted from local memory.

Example 2 Incoming Discretionary Order Participates in the Lead MarketMaker Guarantee Process, the Display Order Process, and the WorkingOrder Process

In this example, an incoming discretionary order uses discretion toexecute against a posted customer order and lead market maker quote inthe LMM Guarantee Process. The internal order book 29 a also contains aposted discretionary order that is unable to execute in the LMMGuarantee Process because its display price is inferior to the NBBO,even though its discretionary price can step up to the NBBO. After theLMM Guarantee Process completes, the process continues to execute theincoming discretionary order against the remaining displayed orders andmarket maker quotes, and the posted discretionary order is finallyallowed to execute after the displayed interest has executed first. Forease of illustration, only the offer side of the books is shown in thisexample.

→The NBBO is 1.95 to 2.05

The offer side of the away market BBO quote book 25 a looks like this:

Offer Details Source Time received AwayMktA Offer 10 @ 2.10 Away MarketA 10:02:32 AwayMktB Offer 20 @ 2.15 Away Market B 10:03:15

The offer side of the market maker quote book 33 a looks like this:

Offer Details Source Time received Quote A Offer 20 @ 2.05 LMM 10:04:22Quote B Offer 30 @ 2.10 MM2 10:00:15

The offer side of the internal order book 29 a looks like this:

Order Details On behalf of Time received Order D Sell 30 @ 2.05Non-customer 10:01:03 Order E Sell 10 @ 2.05, Customer 10:03:50Discretion to 2.00 Order G Sell 10 @ 2.20, Customer 10:00:20 Discretionto 2.05

The offer side of the public order book looks like this:

Published Offers 60 @ 2.05 30 @ 2.10 10 @ 2.20Step 2 a: Incoming Discretionary Order Passes Check for ExcessiveMarketability

In step 400 (FIG. 4A), the process receives the following incomingdiscretionary buy order:

Order U2: Buy 100@2.00, Discretionary Price=2.10

In step 402, the process retrieves the NBO (2.05). In step 404, itchecks if incoming Discretionary Buy Order U2's display price (2.00) isgreater than or equal to the NBO (2.05). As incoming Discretionary BuyOrder U2's display price is lower, the process continues to step 406,where it checks if incoming Discretionary Buy Order U2's discretionaryprice (2.10) is greater than or equal to the NBO (2.05). As incomingDiscretionary Buy Order U2's discretionary price is higher, this meansthe order is marketable unless it is rejected for being “tooexecutable.” The process continues to step 410, where it initiates theToo-Executable Buy Order Check Process and proceeds to step 500 (FIG.5).

In step 502, the process evaluates whether the check for excessivediscretion is enabled for this order type. In this example, the marketcenter 20 has decided to check discretionary prices and display pricesfor excessive marketability. As incoming Buy Order U2 is a discretionaryorder, the process continues to step 504, where it checks if incomingBuy Order U2's discretionary price (2.10) is greater than the NBO(2.05). As it is, the process continues to step 506, where it retrievesthe stored parameter that specifies the maximum percentage allowedthrough the NBBO (“MaxPercentOffNBBO”). In this example, theMaxPercentOffNBBO is configured to be 15%, i.e., an incomingdiscretionary order's discretionary price is allowed to be up to 15%more aggressive than the opposite side of the NBBO.

In step 508, the process derives the maximum allowable price incrementthrough the NBBO (“MaxPriceThruNBO”) by multiplying theMaxPercentOffNBBO (15%) and the NBO price (2.05). The MaxPriceThruNBO iscomputed as 0.3075 (15% of 2.05=0.3075), which is rounded down to 0.30,the nearest tick. In step 510, the process computes the highest validdiscretionary price for incoming Buy Order U2 (“MaxBuyPrice”) by addingthe derived MaxPriceThruNBO (0.30) to the NBO (2.05), yielding aMaxBuyPrice=2.35. In step 512, the process checks if incoming Buy OrderU2's discretionary price (2.10) is greater than the derived MaxBuyPrice(2.35). As it not greater, incoming Buy Order U2's discretionary priceis not “too executable,” and accordingly the process continues to step513, where it returns to the step where it was originally initiated,back to step 410. The process continues to step 411, where it generatesa virtual consolidated order and quote list for the option series.

The offer side of the virtual consolidated order and quote list lookslike this:

Order or Quote Details Source Time received Order D Sell 30 @ 2.05Non-customer 10:01:03 Order E Sell 10 @ 2.05, Customer 10:03:50Discretion to 2.00 Quote A Offer 20 @ 2.05 LMM 10:04:22 Quote B Offer 30@ 2.10 MM2 10:00:15 AwayMktA Offer 10 @ 2.10 Away Market A 10:02:32AwayMktB Offer 20 @ 2.15 Away Market B 10:03:15 Order G Sell 10 @ 2.20,Customer 10:00:20 Discretion to 2.05

The process continues to step 412, where it checks if this issue hasassigned market makers. As it does, the process continues to step 414,where it checks if incoming Discretionary Buy Order U2 is a directedorder. As it is not, the process continues to step 418, where itinitiates the LMM Guaranteed Offer Process, and proceeds to step 600(FIG. 6).

Step 2 b: LMM Guarantee Process is in Effect for this Issue

In step 602, the process retrieves the lead market maker's offer(20@2.05). In step 604, the process checks if the lead market maker'soffer is at the NBO. As it is, the lead market maker is entitled toguaranteed participation with incoming Discretionary Buy Order U2, afterany superior displayed customer orders are executed first. The processcontinues to step 608, where it checks if incoming Discretionary BuyOrder U2's size is greater than two contracts. As it is, the processcontinues to step 614.

Step 2 c: Incoming Discretionary Order Matches Displayed Customer Orderwith Time Priority Over the LMM Quote

In step 614, the process checks if there are any displayed customer sellorders at the NBO, and finds posted Sell Order E. As posted Sell Order Eis a displayed customer order at the NBO, the process stores thetimestamp of the LMM Offer (10:04:22) in step 616. In step 618, itretrieves posted customer Sell Order E. In step 620, it compares thetimestamp of posted Sell Order E (10:03:50) to the timestamp of the LMMOffer (10:04:22). As posted Sell Order E was received prior to the leadmarket maker's offer, in step 622, the process matches 10 contracts ofincoming Discretionary Buy Order U2 with posted Sell Order E, completelydepleting posted Sell Order E and removing it from the books.

The offer side of the virtual consolidated order and quote list nowlooks like this:

Order or Quote Details Source Time received Order D Sell 30 @ 2.05Non-customer 10:01:03 Quote A Offer 20 @ 2.05 LMM 10:04:22 Quote B Offer30 @ 2.10 MM2 10:00:15 AwayMktA Offer 10 @ 2.10 Away Market A 10:02:32AwayMktB Offer 20 @ 2.15 Away Market B 10:03:15 Order G Sell 10 @ 2.20,Customer 10:00:20 Discretion to 2.05

The offer side of the internal order book 29 a now looks like this:

Order Details On behalf of Time received Order D Sell 30 @ 2.05Non-customer 10:01:03 Order G Sell 10 @ 2.20, Customer 10:00:20Discretion to 2.05

The offer side of the public order book now looks like this:

Published Offers 50 @ 2.05 ← 30 @ 2.10 10 @ 2.20

In step 624, the process checks if incoming Discretionary Buy Order U2still has any contracts remaining. As it still has 90 contracts, itcontinues to step 628, where it checks if there are any more displayedcustomer sell orders at the NBO. Note that although posted customer SellOrder G has discretion up to 2.05, the NBO, it is not displayed at theNBO (it is displayed at 2.20), and is therefore ineligible toparticipate in the LMM Guarantee Process. Accordingly, as there are noother displayed customer sell orders at the NBO, the process proceeds tostep 632.

Step 2 d: Incoming Discretionary Order Matches the LMM Quote Accordingto Guaranteed Participation Rules

In step 632, the process retrieves the LMMGuaranteedPercent parameter,which is configured to 40% in this example. In step 634, the processderives the LMMGuaranteedAllocation (36 contracts) by multiplying theLMMGuaranteedPercent (40%) by the remaining portion of incomingDiscretionary Buy Order U2 (90 contracts). The LMMGuaranteedAllocationis the maximum quantity of contracts that can execute in the LMMGuarantee Process.

In step 638, the process matches 20 contracts of incoming DiscretionaryBuy Order U2 against the lead market maker's offer, the lesser of theLMMGuaranteedAllocation (36 contracts) and the LMM Offer size (20contracts), at the NBO price of 2.05. It does this by generating an IOCpseudo-order to Sell 20@2.05 on behalf of Quote A, the lead marketmaker's offer, and executing incoming Buy Order U2 against the sellpseudo-order. The lead market maker's offer at 2.05 is completelydepleted, and is removed from the virtual consolidated order and quotelist. The process notifies the market maker quote engine 32 b todecrement the lead market maker's offer by the 20 contracts executed.The LMM Guarantee Process has completed.

The offer side of the virtual consolidated order and quote list nowlooks like this:

Order or Quote Details Source Time received Order D Sell 30 @ 2.05Non-customer 10:01:03 Quote B Offer 30 @ 2.10 MM2 10:00:15 AwayMktAOffer 10 @ 2.10 Away Market A 10:02:32 AwayMktB Offer 20 @ 2.15 AwayMarket B 10:03:15 Order G Sell 10 @ 2.20, Customer 10:00:20 Discretionto 2.05

The offer side of the market maker quote book 33 a now looks like this,as the lead marker maker has not replenished its offer yet:

Offer Details Source Time received Quote B Offer 30 @ 2.10 MM2 10:00:15

The offer side of the public order book now looks like this:

Published Offers 30 @ 2.05 ← 30 @ 2.10 10 @ 2.20Step 2 e: Incoming Discretionary Order Matches Broker/Dealer Order

The process continues to step 642, where it checks if incomingDiscretionary Buy Order U2 still has any contracts available. Asincoming Discretionary Buy Order U2 still has 70 contracts remaining,the process proceeds to step 646, where it returns to the step where itwas originally initiated, back to step 418 (FIG. 4A).

The process continues to step 436, where it checks if incomingDiscretionary Buy Order U2's display price (2.00) is greater than orequal to the NBO (2.05). As the display price is lower, the processcontinues to step 438, where it checks if incoming Discretionary BuyOrder U2's discretionary price (2.10) is greater than or equal to theNBO (2.05). As it is greater, the process continues to step 440, whereit checks if the market center 20 is at the NBO. As it is at the NBO,the process continues to step 442, where it retrieves the displayed sellorder or market maker offer with the highest ranking in the DisplayOrder Process, which is Sell Order D.

In step 444, the process matches 30 contracts of incoming DiscretionaryBuy Order U2 with posted Sell. Order D, at the NBO price of 2.05,completely depleting posted Sell Order D and removing it from the books.

The offer side of the virtual consolidated order and quote list nowlooks like this:

Order or Quote Details Source Time received Quote B Offer 30 @ 2.10 MM210:00:15 AwayMktA Offer 10 @ 2.10 Away Market A 10:02:32 AwayMktB Offer20 @ 2.15 Away Market B 10:03:15 Order G Sell 10 @ 2.20, Customer10:00:20 Discretion to 2.05

The offer side of the internal order book 29 a now looks like this:

Order Details On behalf of Time received Order G Sell 10 @ 2.20,Customer 10:00:20 Discretion to 2.05

The offer side of the public order book now looks like this:

Published Offers 30 @ 2.10 ← 10 @ 2.20

In step 446, the process checks if incoming Discretionary Buy Order U2has any contracts remaining, and determining that it still has 40contracts, returns to step 436, where it checks if incomingDiscretionary Buy Order U2's display price (2.00) is greater than orequal to the NBO (2.10). As the display price is lower, the processcontinues to step 438, where it checks if incoming Discretionary BuyOrder U2's discretionary price (2.10) is greater than or equal to theNBO (now 2.10). As the prices are equal, the process continues to step440, where it checks if the market center 20 is at the NBO. As it is atthe NBO, the process continues to step 442, where it retrieves thedisplayed sell order or market maker offer with the highest ranking inthe Display Order Process, which is Quote B, the MM2 Offer.

By way of explanation, although resting Discretionary Sell Order G canstep up to the price of 2.05, which is superior to Quote B (2.10), bydefinition a posted discretionary order cannot use discretion to stepahead of another executable displayed order or market maker quote. Aresting discretionary order can use discretion to execute only if anincoming order is about to be posted, canceled, hidden, repriced lessaggressively, or routed to an away market.

Step 2 f: Incoming Discretionary Order Matches Non-Lead Market MakerQuote

As Quote B is a market maker offer, the process continues to step 443,where it generates an IOC pseudo-order to sell 30 contracts at 2.10 onbehalf of Quote B. The process continues to step 444, where it matches30 contracts of incoming Discretionary Buy Order U2 against the sellpseudo-order. Quote B is completely depleted, and is removed from thevirtual consolidated order and quote list. The process notifies themarket maker quote engine 32 b to decrement the MM2 Offer by the 30contracts executed.

The offer side of the virtual consolidated order and quote list nowlooks like this:

Order or Quote Details Source Time received AwayMktA Offer 10 @ 2.10Away Market A 10:02:32 AwayMktB Offer 20 @ 2.15 Away Market B 10:03:15Order G Sell 10 @ 2.20, Customer 10:00:20 Discretion to 2.05

The offer side of the market maker quote book 33 a is completelydepleted, as the lead market maker and market maker MM2 have notreplenished their quotes yet.

The offer side of the public order book now looks like this:

Published Offers 10 @ 2.20 ←

The process continues to step 446, where it checks if incomingDiscretionary Buy Order U2 has any remaining contracts, and determiningthat it still has 10 contracts, returns to step 436, where it checks ifincoming Discretionary Buy Order U2's display price (2.00) is greaterthan or equal to the NBO (2.10). As the display price is lower, theprocess continues to step 438, where it checks if incoming DiscretionaryBuy Order U2's discretionary price (2.10) is greater than or equal tothe NBO (2.10). As the prices are equal, the process continues to step440, where it checks if the market center 20 is at the NBO. As AwayMarket A is now alone at the NBO, the process continues to step 448.

Step 2 g: Incoming Discretionary Order is about to Route to an AwayMarket

In step 448, the process checks if there are any resting discretionarysell orders that can step up to the NBO, as incoming Discretionary BuyOrder U2 is about to route to Away Market A. As posted DiscretionarySell Order G can step up to the NBO price of 2.10, the process proceedsto step 450, where it initiates the Discretionary Sell Orders Step Up toNBO Process, and proceeds to step 900 (FIG. 9).

Step 2 h: Posted Discretionary Order Steps Up to NBO: Both IncomingDiscretionary Order and Posted Discretionary Order Require Discretion toTrade (Discretionary-to-Discretionary Interaction)

In step 902, the process retrieves resting Discretionary Sell Order G.In step 904, it checks if incoming Discretionary Buy Order U2's Leavesquantity (10 contracts) is greater than or equal to restingDiscretionary Sell Order G's minimum discretion size. As restingDiscretionary Sell Order G does not have a minimum discretion size andit therefore defaults to zero, incoming Buy Order U2's size is greater.

The process continues to step 910, where it matches the remaining 10contracts of incoming Discretionary Buy Order U2 against restingDiscretionary Sell Order G, at the NBO price of 2.10. By way ofexplanation, although Discretionary Sell Order G could step up as highas 2.05, when two Discretionary Orders match and both require discretionfor the match, the execution occurs at the price of the incoming order,capped at the side of the NBBO opposite to the incoming order.

In step 912, the process checks if incoming Discretionary Buy Order U2has any quantity remaining, and determining that it does not, theprocess terminates in step 914. Posted Discretionary Sell Order G isalso completely depleted, and is removed from the books.

The offer side of the virtual consolidated order and quote list nowlooks like this:

Order or Quote Details Source Time received AwayMktA Offer 10 @ 2.10Away Market A 10:02:32 AwayMktB Offer 20 @ 2.15 Away Market B 10:03:15

As incoming Discretionary Buy Order U2 has been completely depleted, thevirtual consolidated order and quote list is deleted from local memory.

The offer side of the market maker quote book 33 a is completelydepleted until the market makers refresh their offers. The offer side ofthe internal order book 29 a has been completely depleted. The offerside of the public order book has been completely depleted in thisexample.

Example 3 Posted Discretionary Order with Minimum Discretion Size StepsUp to “Trade and Ship” Exception Price (One Tick Inferior to the NBBO)

This example illustrates how a discretionary order can step up and tradeat one minimum price increment (tick) worse than the NBBO, for exampleusing the “trade and ship” exception, which allows certain incomingorders to execute off the NBBO contemporaneously with satisfying allaway markets at the NBBO. The example also illustrates how a restingdiscretionary order trades when it has a minimum discretion size. Forease of illustration, the virtual consolidated order and quote list isnot reconstructed from its component books each time a new order isreceived, but is shown as if it remained in local memory as the ordersare processed.

→The NBBO is 2.00 to 2.15 (60×20).

The away market BBO quote book 25 a looks like this:

Bids Offers Disseminated Disseminated Source Quotes Source Quotes AwayMarket A Bid 20 @ 2.00 Away Market B Offer 20 @ 2.15 Away Market B Bid30 @ 1.90 Away Market A Offer 40 @ 2.20

The market maker quote book 33 a looks like this:

Bids Offers Source Disseminated Quotes Source Disseminated Quotes LMMBid 40 @ 2.00 LMM Offer 20 @ 2.25

The internal order book 29 a looks like this:

Bids Offers On behalf of Buy Order details On behalf of Sell Orderdetails Customer Order A: Customer Order F: Buy 20 @ 1.95 Sell 10 @ 2.25Broker/Dealer Order B: Buy 10 @ 1.90→The market center BBO is 2.00 to 2.25 (40×30)

The public order book looks like this:

Published Bids Published Offers 40 @ 2.00 30 @ 2.25 20 @ 1.95 10 @ 1.90Step 3 a: Post a Nonmarketable Discretionary Order with a MinimumDiscretion Size

The order matching engine 21 receives the following order in step 1400(FIG. 12A):

-   -   Order R1: Sell 30@2.25, Discretionary Price=2.20, Minimum        Discretion Size=

In step 1402, the process retrieves the NBB (2.00). In step 1404, itchecks if incoming Discretionary Sell Order R1's display price (2.25) isless than or equal to the NBB (2.00). As incoming Discretionary SellOrder R1's display price is higher, the process continues to step 1406,where it checks if incoming Discretionary Sell Order R1's discretionaryprice (2.20) is less than or equal to the NBB (2.00). As incomingDiscretionary Sell Order R1's discretionary price is higher, the processcontinues to step 1407, where it checks if incoming Discretionary SellOrder's discretionary price (2.20) is less than or equal to the NBO(2.15). As it is not, this means the incoming sell order cannot executeeven if there are posted discretionary buy orders in the internal orderbook 29 a.

The process continues to step 1460, where it inserts incomingDiscretionary Sell Order R1 in the Display Order Process of the internalorder book 29 a and ranks it in price/time priority according to itsdisplay price of 2.25. The process continues to step 1462, where itinserts Discretionary Sell Order R1's discretionary price of 2.20 in theWorking Order Process of the internal order book 29 a. The processcontinues to step 1464, where it disseminates Discretionary Sell OrderR1's display price to the public order book. The process terminates instep 1466 as indicated. Posted Discretionary Sell Order R1 has a lowerpriority than the lead market maker's offer and posted Sell Order F,both of which have time priority at the price of 2.25. PostedDiscretionary Sell Order R1 has a Minimum Discretion Size=20, whichmeans it will use discretion to trade only if at least 20 contracts canexecute.

→The NBBO is still 2.00 to 2.15 (60×20).

The internal order book 29 a now looks like this:

Bids Offers On behalf of Buy Order details On behalf of Sell Orderdetails Customer Order A: Customer Order F: Buy 20 @ 1.95 Sell 10 @ 2.25Broker/Dealer Order B: Customer Order R1: ← Buy 10 @ 1.90 Sell 30 @2.25, Discretion to 2.20, Minimum Discretion Size = 20

The market maker quote book 33 a remains unchanged and still looks likethis:

Bids Offers Source Disseminated Quotes Source Disseminated Quotes LMMBid 40 @ 2.00 LMM Offer 20 @ 2.25→The market center BBO is now 2.00 to 2.25 (40×60)

Sell Order R1's quantity (30) is aggregated with Sell Order F's quantity(10) and the lead market maker's offer quantity (20). The public orderbook now looks like this:

Published Bids Published Offers 40 @ 2.00 60 @ 2.25 ← 20 @ 1.95 10 @1.90Step 3 b: Post a Second Nonmarketable Discretionary Order at a WorseDisplayed Price

The order matching engine 21 receives the following order in step 1400:

Order R2: Sell 20 @ 2.30, Discretionary Price=2.25

In step 1402, the process retrieves the NBB (2.00). In step 1404, itchecks if incoming Discretionary Sell Order R2's display price (2.30) isless than or equal to the NBB (2.00). As incoming Discretionary SellOrder R2's display price is higher, the process continues to step 1406,where it checks if incoming Discretionary Sell Order R2's discretionaryprice (2.25) is less than or equal to the NBB (2.00). As incomingDiscretionary Sell Order R2's discretionary price is higher, the processcontinues to step 1407, where it checks if incoming Discretionary SellOrder R2's discretionary price (2.25) is less than or equal to the NBO(2.15). As it is not, this means incoming Discretionary Sell Order R2 isnot executable even if there are posted discretionary buy orders in theinternal order book 29 a.

The process continues to step 1460, where it inserts incomingDiscretionary Sell Order R2 in the Display Order Process of the internalorder book 29 a and ranks it in price/time priority according to itsdisplay price of 2.30. The process continues to step 1462, where itinserts Discretionary Sell Order R2's discretionary price of 2.25 in theWorking Order Process of the internal order book 29 a. The processcontinues to step 1464, where it disseminates Discretionary Sell OrderR2's display price to the public order book. The process terminates instep 1466 as indicated. Posted Discretionary Sell Order R2 has thelowest offer in the virtual consolidated order and quote list.

→The NBBO is still 2.00 to 2.15 (60×20).

The internal order book 29 a now looks like this:

Bids Offers On behalf of Buy Order details On behalf of Sell Orderdetails Customer Order A: Customer Order F: Buy 20 @ 1.95 Sell 10 @ 2.25Broker/Dealer Order B: Customer Order R1: Buy 10 @ 1.90 Sell 30 @ 2.25,Discretion to 2.20, Minimum Discretion Size = 20 Broker/Dealer Order R2:← Sell 20 @ 2.30, Discretion to 2.25→The market center BBO is still 2.00 to 2.25 (40×60)

The public order book now looks like this:

Published Bids Published Offers 40 @ 2.00 60 @ 2.25 20 @ 1.95 20 @ 2.30← 10 @ 1.90Step 3 c: Incoming Limit Buy Order is about to Route

In step 1000 (FIG. 10A), the process receives the following sweep limitorder:

Order U1: Buy 40@2.20, Sweep Limit

In step 1001, the process retrieves the NBBO (2.00 to 2.15). In step1002, it checks if incoming Buy Order U1's price (2.20) is lower thanthe NBB (2.00). As it is higher than the NBB, the process continues tostep 1006, where it checks if incoming Buy Order U1's price (2.20) ishigher than the NBO (2.15). As incoming Buy Order U1's price is higher,the process continues to step 1008, where it initiates theToo-Executable Buy Order Check Process, and proceeds to step 500 (FIG.5).

In step 502, the process evaluates whether the check for excessivediscretion is enabled for this order type. As incoming Buy Order U1 isnot a discretionary order, it is not enabled. The process continues tostep 520, where it evaluates whether the check for excessivemarketability is enabled for this order type. As incoming Buy Order U1is a sweep limit order, the check is enabled. The process continues tostep 524, where it checks if incoming Buy Order U1's display price(2.20) is greater than the NBO (2.15). As it is, the process continuesto step 528, where it retrieves the stored parameter that specifies themaximum percentage allowed through the NBBO (“MaxPercentOffNBBO”). Inthis example, the MaxPercentOffNBBO is configured to be 15%, i.e., anincoming limit order's price is allowed to be up to 15% more aggressivethan the opposite side of the NBBO.

In step 530, the process derives the maximum allowable price incrementthrough the NBBO (“MaxPriceThruNBO”) by multiplying theMaxPercentOffNBBO (15%) and the NBO price (2.15). The MaxPriceThruNBO iscomputed as 0.3225 (15% of 2.15=0.3225), which is rounded down to 0.30,the nearest tick (this issue uses a legacy tick of 0.05 at this pricelevel). In step 532, the process computes the highest valid price forincoming Buy Order U1 (“MaxBuyPrice”) by adding the derivedMaxPriceThruNBO (0.30) to the NBO (2.15), yielding a MaxBuyPrice=2.45.In step 534, the process checks if incoming Buy Order U1's price (2.20)is greater than the derived MaxBuyPrice (2.45). As it not greater,incoming Buy Order U1 is not “too executable,” and accordingly theprocess continues to step 536, where it returns to the step where it wasoriginally initiated, back to step 1008 (FIG. 10A).

Now that the order matching engine 21 has determined that the incomingorder is not too executable, it continues to step 1011, where itgenerates a virtual consolidated order and quote list for the optionseries. The virtual consolidated order and quote list looks like this:

Bids Offers Source Bid details Source Offer details LMM Bid 40 @ 2.00Away Market B Offer 20 @ 2.15 Away Market A Bid 20 @ 2.00 Away Market AOffer 40 @ 2.20 Customer Order A: Customer Order F: Buy 20 @ 1.95 Sell10 @ 2.25 Broker/Dealer Order B: LMM Offer 20 @ 2.25 Buy 10 @ 1.90 AwayMarket B Bid 30 @ 1.90 Customer Order R1: Sell 30 @ 2.25, Discretion to2.20, Minimum Discretion Size = 20 Broker/Dealer Order R2: Sell 20 @2.30, Discretion to 2.25

The process continues to step 1030, where it checks if this issue hasany assigned market makers. As it does, the process continues to step1032, where it checks if the incoming buy order is a directed order ornot. As it is not a directed order, the process continues to step 1036,where it initiates the LMM Guaranteed Offer Process, and proceeds tostep 600 (FIG. 6).

In step 602, the process retrieves the NBO (2.15). In step 604, itchecks if the lead market maker's offer (2.25) is at the NBO (2.15). Asthe lead market maker's offer is inferior to the NBO, the processcontinues to step 606, where it returns to the step where it wasoriginally initiated, back to step 1036 (FIG. 10B). The processcontinues to step 1038, where it checks if incoming Buy Order U1 (2.20)is still greater than or equal to the NBO (2.15). As the NBO isunchanged, the process continues to step 1042, where it checks if themarket center 20 is at the NBO.

Step 3 d: No Posted Discretionary Orders can Step Up to the NBBO;Incoming Limit Order Routes to an Away Market

As Away Market B is alone at the NBO, the process continues to step1050, where it checks if there are any resting discretionary sell ordersthat can step up to the NBO. Although there are two restingdiscretionary sell orders on the order book 29 a (Sell Order R1 and SellOrder R2), neither can step up to the NBO price of 2.15. Accordingly,the process continues to step 1054, where it checks if incoming BuyOrder U1 should be routed or not.

As incoming Buy Order U1 is a sweep limit order, it is eligible forrouting. As the obligation to Away Market B's Offer has not already beensatisfied by prior routed buy orders, Away Market B is eligible toreceive a routed order. Accordingly, the process continues to step 1056,where it releases incoming Buy Order U1 to the Routing Process, whichroutes 20 contracts, the lesser of incoming Buy Order U1's size (40contracts) and the unsatisfied size of Away Market B's Offer (20contracts), at the NBO price of 2.15.

In step 1058, the process checks if incoming Buy Order U1 has anycontracts remaining, and as it still has 20 contracts available, theprocess continues to step 1060, where it checks if incoming Buy Order U1is allowed to execute beyond the NBO according to the rules of the ordertype. As sweep limit orders are allowed to execute beyond the NBO, theprocess continues to step 1062, where it initiates the Posted Sell OrderTrade-and-Ship Price Check Process and proceeds to step 1100 (FIG. 11).

Step 3 e: Posted Discretionary Order Steps Up to “Trade and Ship”Exception Price to Contemporaneously Match Incoming Limit Order

According to present marketplace rules (e.g., the “trade and ship”exception), an incoming order is allowed to contemporaneously executewith orders priced at one tick inferior to the NBO after all the awaymarkets at the NBO have been satisfied. In step 1102, the processdetermines the “TradeAndShipPrice” parameter, i.e., the price that isone tick inferior to the current NBO, by adding one tick (0.05 at thisprice level) to the NBO (2.15) to derive the TradeAndShipPrice=2.20. Instep 1104, the process retrieves the displayed sell order with thehighest ranking in the Display Order Process. The highest-rankeddisplayed order is resting Sell Order F.

In step 1106, the process checks if resting Sell Order F's price (2.25)is equal to the derived TradeAndShipPrice (2.20). As it is not, SellOrder F is not eligible to execute using the “trade and ship” exception.The process continues to step 1116, where it checks if there are anyresting discretionary sell orders that can step up to theTradeAndShipPrice of 2.20. As resting Discretionary Sell Order R1 canstep up to the price of 2.20, the process retrieves it in step 1118.

In step 1120, the process checks if incoming Buy Order U1's Leavesquantity (20 contracts) is greater than or equal to resting Sell OrderR1's minimum discretion size (20 contracts). As the quantities areequal, this means resting Discretionary Sell Order R1 is eligible to useits discretion to participate in the execution. In step 1122, theprocess matches the remaining 20 contracts of incoming Buy Order U1against resting Discretionary Sell Order 121 at the TradeAndShipPrice of2.20. In step 1124, the process checks if incoming Buy Order U1 has anycontracts remaining, and as it does not, the process terminates in step1126 as indicated. Discretionary Sell Order R1 still has 10 contractsremaining. As the Leaves quantity of posted Sell Order R1 (10) is nowlower than its minimum discretion size (20), the process zeroes out theminimum discretion size so that the remainder of the order can completetrading with discretion if discretion is required.

→The NBBO is, still 2.00 to 2.15 (60×20).

The virtual consolidated order and quote list now looks like this:

Bids Offers Source Bid details Source Offer details LMM Bid 40 @ 2.00Away Market B Offer 20 @ 2.15 Away Market A Bid 20 @ 2.00 Away Market AOffer 40 @ 2.20 Customer Order A: Customer Order F: Buy 20 @ 1.95 Sell10 @ 2.25 Broker/Dealer Order B: LMM Offer 20 @ 2.25 Buy 10 @ 1.90 AwayMarket B Bid 30 @ 1.90 Customer Order R1: Sell 10 @ 2.25, ← Discretionto 2.20, Minimum Discretion Size = 0 Broker/Dealer Order R2: Sell 20 @2.30, Discretion to 2.25

The internal order book 29 a now looks like this:

Bids Offers On behalf of Buy Order details On behalf of Sell Orderdetails Customer Order A: Customer Order F: Buy 20 @ 1.95 Sell 10 @ 2.25Broker/Dealer Order B: Customer Order R1: Buy 10 @ 1.90 Sell 10 @ 2.25,← Discretion to 2.20, Minimum Discretion Size = 0 Broker/Dealer OrderR2: Sell 20 @ 2.30, Discretion to 2.25→The market center BBO is now 2.00 to 2.25 (40×40)

The public order book now looks like this:

Published Bids Published Offers 40 @ 2.00 40 @ 2.25 ← 20 @ 1.95 20 @2.30 10 @ 1.90

The virtual consolidated order and quote list is deleted from localmemory. Away Market B fills the linkage order routed on behalf ofunderlying Buy Order U1. Buy Order U1 is completely filled.

While the invention has been discussed in terms of certain embodiments,it should be appreciated that the invention is not so limited. Theembodiments are explained herein by way of example, and there arenumerous modifications, variations and other embodiments that may beemployed that would still be within the scope of the present invention.

1. (canceled)
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 5. (canceled) 6.(canceled)
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 19. (canceled) 20.(canceled)
 21. (canceled)
 22. (canceled)
 23. A method for tradingdiscretionary orders in an electronic options trading environment withmarket maker participation, comprising: providing a market center whichlists a plurality of options series, wherein the market center has atleast one order book for each option series and at least one quote bookfor each option series, wherein the order book has a displayed interestcomponent which is processed in a display order process and anondisplayed interest component which is processed in a working orderprocess, and wherein at least a portion of plurality of the optionseries have a lead market maker; posting a discretionary order having atotal size, a display price for display, and a discretionary price thatis not for display; receiving an incoming contra side order having asecond total size, a second display price for display, and a seconddiscretionary price that is not for display, wherein the incoming contraside order is on the side of the order book opposite to thediscretionary order; determining if the incoming contra side order isfor an option series that has a second lead market maker; responsive todetermining that the incoming contra side order is for the option seriesthat has the second lead market maker: determining if the second leadmarket maker has a quote at the NBBO; responsive to determining that thesecond lead market maker has the quote at the NBBO: computing anallocation percentage for the second lead market maker; matching theincoming contra side order up to the lesser of the second total size ofthe incoming contra side order or the computed allocation percentageamount for the second lead market maker; and after matching the incomingcontra side order with the second lead market maker quote, matching atleast a portion of the remainder of the incoming contra side order withthe discretionary order using the second display price.
 24. Thediscretionary order trading method of claim 23, further comprising:matching at least another portion of the remainder of the incomingcontra side order with other displayed orders in the display orderprocess; matching at least a portion of the remainder of the incomingcontra side order with other posted discretionary orders that cannotexecute at their display price in the display order process, but thatcan execute using their discretionary price in the working orderprocess.
 25. (canceled)
 26. The discretionary order trading method ofclaim 23, wherein the lead market maker has a quote at the NBO.
 27. Thediscretionary order trading method of claim 23, wherein the lead marketmaker has a quote at the NBB.
 28. The discretionary order trading methodof claim 23, further comprising: providing at least one appointed marketmaker in the option series in addition to the lead market maker; whereinthe incoming contra side order is from a specified order sending firmand is directed to and designates the at least one appointed marketmaker; determining if the order sending firm has permission to directorders to the appointed market maker; responsive to determining that theorder sending firm does have permission to direct orders to theappointed market maker: determining if the appointed market maker has aquote at the NBBO; responsive to determining that the appointed marketmaker has the quote at the NBBO: computing an allocation percentage forthe appointed market maker; and matching the incoming contra side orderup to the lesser of the total size of the incoming contra side order orthe computed allocation percentage amount for the appointed marketmaker.
 29. The discretionary order trading method of claim 28, furthercomprising, prior to computing the appointed market maker allocationpercentage: determining if the order book has at least one customerorder at the NBBO; responsive to determining that the order book doeshave at least one customer order at the NBBO: determining if the atleast one customer order is displayed and was posted to the order bookprior to the appointed market maker quote at the NBBO; and responsive todetermining that the at least one customer order is displayed and wasposted to the order book prior to the appointed market maker quote atthe NBBO: matching the incoming order with the at least one customerorder.
 30. The discretionary order trading method of claim 29, whereinif the at least one customer order was posted to the order book afterthe appointed market maker quote at the NBBO, computing allocationpercentage.
 31. The discretionary order trading method of claim 29,wherein if the at least one customer order at the NBBO is not displayed,computing the allocation percentage.
 32. The discretionary order tradingmethod of claim 28, wherein the appointed market maker has a quote atthe NBO.
 33. The discretionary order trading method of claim 28, whereinthe appointed market maker has a quote at the NBB.
 34. The discretionaryorder trading method of claim 23, wherein the market center includes arouting process and wherein the incoming contra side order is processedby the routing process.
 35. A market center which lists a plurality ofoptions series and handles discretionary order trading, comprising: atleast one order book for each option series and at least one quote bookfor each option series, wherein the order book has a displayed interestcomponent and a nondisplayed interest component, and wherein a pluralityof the option series have lead market maker; at least one interface forreceiving orders and an interface for receiving quotes; at least onemarket center memory for storing code for analyzing and processingorders and quotes; at least one processor for interacting with theinterfaces and executing the code for analyzing and processing quotesand orders, wherein the code, when executed: posts a discretionary orderhaving a total size, a display price for display, and a discretionaryprice that is not for display on the market center; receives an incomingcontra side order, wherein the incoming contra side order resides on theside of the order book opposite to the discretionary order; determinesif the incoming contra side order is for at least one option series thathas a second lead market maker; responsive to determining that theincoming contra side order is for the at least one option series thathas the second lead market maker: determines if the second lead marketmaker has a quote at the NBBO; responsive to determining that the secondlead market maker has the quote at the NBBO: computes an allocationpercentage for the second lead market maker; matches the incoming contraside order up to the lesser of the total size of the incoming contraside order or the computed allocation percentage amount for the secondlead market maker; determines if the discretionary order has a seconddisplay price that is inferior to the NBBO and has a seconddiscretionary price that is superior or equal to the NBBO; andresponsive to determining that the posted discretionary order has thesecond display price that is inferior to the NBBO and has a seconddiscretionary price that is superior or equal to the NBBO: matches atleast a portion of the remainder of the incoming contra side order withthe discretionary order using the second display price to execute at theNBBO.
 36. (canceled)
 37. (canceled)
 38. (canceled)
 39. (canceled) 40.(canceled)
 41. (canceled)
 42. The method of claim 23, wherein the marketcenter is a computing system.
 43. The method of claim 42, wherein thecomputing system is one or more programmed computers.
 44. The method ofclaim 42, wherein the computing system is distributed over severalphysical locations.
 45. The market center of claim 35, wherein themarket center is a computing system.
 46. The market center of claim 45,wherein the computing system is one or more programmed computers. 47.The market center of claim 45, wherein the computing system isdistributed over several physical locations.
 48. The market center ofclaim 35, wherein the computing system is one or more programmedcomputers.
 49. The market center of claim 35, wherein the display priceand second display price are the same and the discretionary price andsecondary discretionary price are the same.